Having risen 31% in 2021, the Lloyds (LSE: LLOY) share price is on its way back down. The stock dropped below 50p in late February and is now at risk of entering the 30p-40p range. With a potential recession on the cards, this could be a possibility.

Interesting developments

In theory, bank stocks should benefit from interest rate rises. This is because they can charge higher interest rates for lending money, thus giving them higher margins. And because of Lloyds’ healthy reserves, it’s been able to keep interest rates it pays out for savings accounts at an all-time low, while charging customers more for loans. As such, I would normally expect its share price to rally. Nonetheless, the opposite has happened. So, why’s that been the case?

The roof’s caving in

In its last trading update, the bank included a table that consisted of prudent economic scenarios. It listed several conditions that have to be met in order for the company to benefit from rising interest rates.

Based on the current economic data and forecasts, Britain’s biggest bank has some upside potential. GDP for 2022 is set to be in line with or better than its various scenarios at 3.5%. Interest rates are expected to increase by more than 1.39%, and the unemployment rate should remain below 4%. However, that’s where the positives end.

The Bank of England (BoE) expects inflation to peak at 11% this year. But more importantly, both the Halifax and Rightmove‘s house price index have indicated that house price growth is beginning to stall. If this continues, it would fail to meet Lloyds’ projections of HPI growth and CRE price growth, endangering its projections. Given that most of its revenue stems from property-related loans, a slower home loans market could offset potential gains from higher interest rates.

Handouts in jeopardy

The FTSE 100 firm currently has a dividend yield of slightly more than 4%, which is above the index’s average. If I’d bought in hopes of a bigger payment at the next declaration date as a result of better margins, I could be disappointed.

Earlier this week, the BoE released its latest Financial Stability Report. It said UK lenders appear to be resilient. Nevertheless, major UK banks would have to set aside more cash to absorb any shocks in the financial markets from next year.

Lloyds will have to raise its buffer for bad debts. The group had already set aside £178m to cover potential customer defaults in Q1, but this is set to increase due to the BoE’s guidance. Consequently, I think its dividend payments might not increase by a huge margin. I could be wrong though. Analysts are forecasting its dividend to grow by 16.1% in the coming year. This may earn me some passive income if I were to invest.

For me, investing in Lloyds is like investing in the British economy and its property market. Economic projections from the World Bank and OECD are less than bullish for the UK currently. Then there’s sky-high inflation and a potential housing market decline that won’t do Lloyds’ top line much good. For those reasons, I won’t be investing in Lloyds shares, as I think its share price could drop below 40p soon.

The post Is the Lloyds share price about to dip below 40p? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

When I compare the Tesco (LSE: TSCO) share price to its UK supermarket peers, it’s actually doing relatively well. Notwithstanding the fact that its 10% down, its competitors are faring much worse. With a higher price-to-earnings (P/E) ratio of 13, Tesco shares may not necessarily scream bargain. Nonetheless, there are positives that warrant a closer at its stock.

As cheap as a meal deal?

For one, Tesco remains the market leader. It boasts more than a quarter of the industry’s market share. This is impressive considering the saturated market in which it operates. Secondly, the most recent Kantar grocery report shows that the grocer managed to grow its market share by 0.2% on a year-on-year (Y/Y) basis, in the 12 weeks to 12 June. More importantly, despite its sales figures taking a 1.1% hit, Tesco still managed to outperform all of its peers, bar Aldi and Lidl.

Tesco’s strength can be attributed to two key reasons, I feel. The first is the success of its Clubcard programme, which encourages repeat purchases through lower prices. The second is the expansion of its bargain line. In its latest Q1 trading update, management mentioned the expansion of its Everyday Low Prices and Aldi Price Match products by 19% (Y/Y).

Tesco can’t ketchup with prices

Kraft Heinz and Tesco can’t seem to agree on how to price its Heinz products. The American company argues that skyrocketing cost has made production more expensive, hence the price increases. But the retailer says that it won’t pass on what it says are unjustifiable price increases to its customers.

As a result, Tesco has stopped stocking Heinz products for the time being. This is in line with trying to keep costs low for consumers while still making a profit. While talks between the two giants are ongoing, some Heinz products have already been made unavailable online. Nevertheless, this isn’t a unique incident. In 2016, Unilever increased its prices too, which resulted in the removal of Marmite, PG Tips, and Pot Noodle from Tesco’s website.

So, will this impact the retailer’s overall sales figures? Well, due to the cost-of-living crisis, management stated that customers are beginning to purchase more own-brands. So, I don’t expect the temporary unavailability of Heinz products to be detrimental, despite many of its products being staples. Having said that, I’ll be monitoring the situation closely, as further disruptions with other suppliers could negatively impact the firm’s top and bottom lines.

Buying back stock

Despite all that, Tesco is in line to achieve the guidance it set out for itself. Additionally, the company decided to put its £750m share buyback programme into effect yesterday. This shows confidence that the current Tesco share price is undervalued.

Taking everything into consideration, I think the shares are reasonably priced, but not a bargain. I’m not a big fan of its slim profit margins (2.5%) that are expected to decline for the foreseeable future, and I don’t see a huge amount of growth in its top line. As such, I won’t be buying Tesco shares for the time being. Instead, I’ll be looking to buy shares that are more resistant to the impact of inflation.

The post Is the current Tesco share price a bargain? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J), Tesco, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Standing tall

As mortgage rates continue to rise as a result of interest rate hikes, demand for homes has cooled. This can be seen in Rightmove‘s June house price index, which shows that house price growth is slowing. As such, analysts are actually expecting prices to drop, hence the overall weakness among the FTSE 100 housebuilder stocks.

Nonetheless, Berkeley stands out as doing better than its Footsie peers year-to-date (YTD). The shares’ performance becomes even more puzzling when I consider that it’s the only developer not paying a dividend. So, what’s behind the stock’s relative strength (bearing in mind that it’s still down this year)?

Berkeley loves the south

Upon analysing the number of houses built, Berkeley’s more solid stock performance gets even more confusing. The Croydon-based developer doesn’t even rank within the top five builders in Britain for house completions.

However, there’s a metric in which Berkeley excels in — average selling price. Due to the housebuilder’s speciality in building posher, London properties, its average house price is two to three times higher than its competitors.

As a ‘luxury’ builder, Berkeley has been able to pass on most of its higher costs to its customers without impacting demand. This was evident in its FY22 results with management citing resilient demand for its properties.

Moreover, Berkeley’s exposure to London and the South East has allowed it to benefit from higher house prices, with the average house price in the capital costing £530,000. This is almost double of the UK average. More importantly, the lack of supply in these regions will most probably protect Berkeley’s top line from declining house prices.

Built like bricks

Aside from its solid stock performance, Berkeley also boasts a solid balance sheet. Although its debt-to-equity ratio of 21% is slightly higher than that of its FTSE 100 peers, its cash position covers its debt comfortably. Additionally, it’s got the second highest profit margin in the industry, at 20.5%, which is also higher than the industry’s average.

Having said that, it mentioned free cash flow of -£131m in its latest results. This would normally alarm me, but this was down to the company’s recent acquisition of St. William. This free cash flow impact should be a one-off and the board expects positive cash flow ahead. The company sold 42% more homes last year after all, and has an order backlog worth £2.2bn, which is an increase from £1.7bn a year ago.

I think Berkeley could be a lucrative housebuilder for me to invest in, if not for one thing. A great deal of uncertainty lies ahead for the housing market, with a potential recession on the cards, the company may be vulnerable, even with its London exposure. For that reason, I’m not ready to buy Berkeley shares at the moment. Instead, I’ll be scouting for potential winners in the event of a stock market crash.

The post Is this FTSE 100 stock the best housebuilder to invest in? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended Redrow. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The Fed is no Pal

Just like PayPal stock, US retail sales figures have been steadily declining since February. In fact, retail sales came in at -0.3% in May, on a month-on-month basis. This is an indication that consumer spending is decreasing as a result of higher interest rates.

The US Federal Reserve is committed to increasing interest rates until inflation retreats back down to 2%. Consequently, several analysts are pencilling the odds of a recession at 50%. If this were to happen, I expect the suffering for PayPal shareholders to get worse.

With less money flowing throughout the US economy, the platform stands to earn less from payments and transfers. This is because higher interest rates means higher borrowing costs, limiting the flow of cash around the economy.

More than just PayPal

Nonetheless, PayPal has a couple of interesting developments that could make it a fortune in the long term, as the fintech group has several brands to it. These businesses are seeing encouraging growth and progress. The list includes PayPal itself, Venmo, Braintree, Paidy, Xoom, Honey, iZettle, and Hyperwallet. I’m extremely upbeat about the group’s future prospects beyond its main business. But in particular, I have my attention focused on Venmo’s prospects as an American mobile payment service.

The company has lined up partnerships with Amazon and Doordash. These big firms are expected to integrate Venmo into their payment options later this year. If successful, I envision these collaborations to bring a flood of cash to the top line for PayPal.

Quantity over quality

Having said that, it’s worth noting that the core business still remains susceptible to harsh economic headwinds. Analysts have revised the stock’s average earnings per share down from $1.24 to $0.97 for the year.

Not to mention, its Venmo partnerships are yet to come into effect. For one, management has been silent on when the Amazon partnership will take place. Secondly, Doordash is yet to agree to business terms and conditions.

However, what concerns me most is its profit margins, which have been on a decline over the last four quarters. PayPal has to compete with the likes of Wise and Western Union, having lost market share over the years. Its current take rate is 2%, which is higher than Wise’s. Therefore, for it to continue being competitive, it’ll have to cut down its margins in order to retain/grow its transaction and customer volumes.

Thinning profit margins (Despite increasing volume) shows that PayPal is losing its pricing power and market dominance. As such, I won’t be buying more PayPal stock for now. Instead, I’ll be holding onto my shares in hopes that the Amazon partnership bears fruit.

The post Should I buy PayPal stock in July? appeared first on The Twelfth Magpie.

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John Choong owns shares of PayPal at the time of writing. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon and PayPal Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Burberry on discount?

There are multiple reasons behind the Burberry share price fall — rocketing inflation, low consumer confidence, fears of an impending recession, you name it. However, one economic metric that stands out is retail sector weakness. Retail sales figures coming out of China have been dismal.

Burberry receives the bulk of its revenue from Asia, and more specifically, China is a key market. As such, lockdowns there have impacted consumer spending substantially. As a result, the country’s retail sales figures have seen a steep decline. For context, China’s retail sales were 11.1% down year on year in April, and down 6.7% in May. Burberry said that Chinese sales accounted for 30% of its turnover last year, but were down 13% in Q4.

Making matters worse, that other key Asian market, South Korea has seen its retail figures decline on a month on month basis since January. Nevertheless, there could be a glimmer of hope for Burberry. As China’s major cities come out of lockdown, I expect sales to start rebounding.

Luxury perks

Do Burberry shares come with good income? Well, the stock goes ex-dividend on 30 June so if I buy it after that, I won’t get the latest dividend payout. But it’s planning a final payout of 35.4p per share, giving it a 2.8% dividend yield. While this isn’t the highest in the FTSE 100 index, the yield still outperforms the luxury industry’s average of 1.7%. Taking these factors into account, I think it’s a reasonable percentage.

Diamonds are created under pressure

Burberry shareholders felt the pressure when its share price dropped as low as £14.80 in May, but that pressure may be about to reverse. The stock has seen a steady recovery since then, and could be on track to head into the green, as retail sales in China are expected to recover sharply in the coming months.

Furthermore, the firm is expected to benefit from travel tailwinds. This is because it generates a substantial amount of revenue from airport stores and tourists shopping in destination cities. Having said that, Burberry will be reporting its Q1 results in around two weeks’ time. I’m not expecting strong figures given the lockdowns in China and poor retail sales data coming out of South Korea.

But like many investors, I’ll be paying close attention to guidance provided by management. A downward revision of its expected earnings for the year could send the share price lower. In that scenario, I’ll be looking to buy some shares. After all, the company has a healthy balance sheet with high-quality earnings margins. Therefore, I think it’s a matter of when, not if, Burberry shares will return to previous highs above £23.

The post Should I buy Burberry shares in July? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Boris Johnson’s Conservative government announced a new, Help to Build scheme late last week. The new proposal is meant to help Britons get onto the property ladder amid the increase in house prices outstripping wage growth. So, here are three FTSE shares that I think stand to gain from this new programme.

Grafton

Grafton (LSE: GFTU) is a FTSE 250 constituent, and could be a beneficiary from the Help to Build scheme. This is because, unlike Help to Buy, the new initiative won’t directly benefit property developers such as Barratt and Taylor Wimpey. The loan is only available for houses built by self-builders and custom builders. As the scheme is set to last until 2026, the group could end up benefiting from a long-lasting tailwind.

Grafton is a builders merchant that sells all sorts of goods required to build a house. These include building materials, timber, decor, DIY items, and pipes. Its manufacturing segment only accounts for 5% of its revenue, so I expect the business’ distribution segment to fair better from the new builds. Not to mention, its history of producing healthy profit margins makes it an attractive stock for me to purchase. However, it’s worth noting that the current cost-of-living crisis could hamper sales figures.

Breedon

Breedon (LSE: BREE) is the UK’s largest independent construction materials firm. It is listed on the FTSE AIM index. The company produced a combine 31.6m tonnes of cement and aggregates in 2021. But more importantly, the board expects further growth this year.

Constructing a new house typically uses more than a 100 tonnes of cement and aggregates. Therefore, I expect the Help to Build scheme to act as a tailwind for the FTSE firm. That being said, Breedon’s revenue doesn’t just stem from building houses. It paves roads and builds other infrastructure as well. Given how well the S&P Global/CIPS UK Construction Purchasing Managers Index (A measure of how well the construction sector is doing) has been performing, Breedon shares could improve in the long term. Its share price also currently trades at a decent price-to-earnings (P/E ratio) of 13, so I see this as a buying opportunity for me.

Dunelm

Inflation continues to run rampant. Thus, new home owners will be looking for bargains in furniture. Thankfully, FTSE 250 staple Dunelm (LSE: DNLM) provides exactly that. Its everyday necessities have an average price of £6, while its furniture has a low average price of £120.

Management has stated its goal of bringing better value proposition to its customers too. This is evident as Dunelm introduced more entry price products and promotional buys, which should entice more customers and purchases.

The retailer still has to compete with IKEA though, as its competitor offers cheaper products in certain categories. That being said, consumers still seem to prefer shopping at Dunelm. This is due to its excellent customer service, such as cheaper deliveries. On that account, as long as Dunelm can maintain its competitive prices and good customer service, I see it being one of the few FTSE shares riding the tailwinds of the new Help to Build scheme.

The post 3 FTSE shares I’m buying with the Help to Build scheme! appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Putting eggs in different baskets

In light of soaring high inflation and lower consumer spending, Tesco reported a generally decent set of Q1 numbers. Overall, group retail sales were up 2% year-on-year (Y/Y), and total sales also saw an increase of 2.5% (Y/Y).

On face value, these figures were confusing to me as I was expecting a decline. However, upon further analysis, these numbers were boosted by the company’s other segments. UK and Republic of Ireland retail sales saw declines of -1.5% and -2.4% respectively. But healthy growth in fuel (44%), Tesco Bank (39%), Booker (19%), and central Europe (9%) helped push the overall top line up.

What caught my eye most was Tesco’s Booker business, which caters food for smaller grocery stores and restaurants. It is a market leader with strong pricing power, high margins, and a growing customer base.

The subsidiary saw 19.4% growth (Y/Y) and 19.6% growth on a three-year like-for-like basis. This is impressive given that CFO Imran Nawaz confirmed that catering inflation is running higher than retail inflation. Given its higher margins, I expect Booker’s performance to hedge against the lower margins from Tesco’s retail business.

Tesco is the way to go

Despite a decline in retail sales, Tesco still manages to outperform the bulk of its peers. In the most recent quarter, the grocer snatched up a further 0.37% of market share, further establishing itself as a market leader. CEO Ken Murphy attributed this growth to a number of factors. These include low prices, its Clubcard scheme, supply chain availability, and shopping experience.

This is evident as Tesco increased its line of Aldi price match and Low Everyday Price products by 19% (Y/Y). Additionally, the FTSE 100 firm had the largest improvement in quality and value perception since the pandemic, showing that shoppers do enjoy shopping at Britain’s number one supermarket.

Drop the Basket

Positives aside, there’s no doubt that Tesco faces strong economic headwinds. Its CEO even went on to say, “We are seeing some early indications of changing customer behaviour as a result of inflationary environment”. As a result of this, I expect Tesco’s shares to take a further dip in the near-term.

Nonetheless, management reaffirmed the company’s retail profit guidance, which remains unchanged at £2.4bn to £2.6bn. This is largely similar to its FY22 figure, although free cash flow is expected to come in shy at £1.4bn to £1.8bn.

That being said, its balance sheet is in a modest position. Tesco boasts a debt-to-equity ratio of 47.3% with decent levels of cash and equivalents. As it continues to establish further dominance in the groceries market, I’m confident that Tesco is in a firm position to brave a potential recession. Even so, its low growth potential doesn’t fit my personal investment strategy. So, I won’t be buying Tesco shares for the time being.

The post Is the Tesco share price great value at £2.50? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Dunelm (LSE: DNLM) shares are already down 40% this year. As economic headwinds continue to pick up, retailers are expected to face a decline in revenue and profits. As such, the Dunelm share price may plunge further into the red.

Retail sales tail off

Earlier this week, the BRC retail sales data showed a third consecutive month of declines. Consumers continue to cut spending amid the cost of living crisis, and it doesn’t seem that Dunelm is spared from this. The chief executive of BRC, Helen Dickinson, noted that high-value items such as furniture took the biggest hit.

The rising cost of living is going to remain the main story for retailers for the immediate future, with consumer confidence a key factor to watch out for.

Source: Paul Martin, UK Head of Retail at KPMG

As a result of this, analysts across the board slashed their expectations for the FTSE 250 firm’s future earnings. Dunelm was initially pencilled in for 1% growth this year. However, earnings are now expected to decline by 0.6% after a slew of negative economic data.

Sticking to old furniture

To make matters worse, Dunelm has plenty of other headwinds to contend with. Increase in house prices from a lack of supply means that there are fewer new homes available for people to move into. Moreover, the mortgage rate also saw an increase to 4.25% this week, hindering future home purchases. Additionally, inflation continues to run rampant at 9% on a year on year basis, squeezing consumers’ wallets even further.

How might all this affect the Dunelm share price then? Well, fewer new homes would mean less demand for new furniture and, consequently, less revenue. The lack of disposable income will then result in a slowdown in furniture spend, as evidenced in the BRC retail sales data. As such, I expect Dunelm shares to take a hit.

A new chair

On the flip side, Dunelm hired a new CFO this week in Karen Witts. Having held a number of executive positions at couple of other FTSE 100 companies, I am excited to see how Witts can further improve the company’s already robust balance sheet.

The retailer’s balance sheet is impeccable to say the least. Having no debt and healthy levels of free cash flow, Dunelm has more than enough firepower to combat a potential economic recession later this year. The company has also managed to increase its profit margins from 8.3% to 10.3% over the last two years. As such, I’m eager to see how the new CFO deals with a potentially declining top line to maintain its margins, while satisfying Dunelm’s goal to gain more market share.

With the furniture and home improvement sector having previously defied a declining retail sales trend, Dunelm may be an outlier in the current economic landscape as it offers excellent value for its products. Nonetheless, I remain dubious of its future outlook given the volatile and uncertain economic climate. Therefore, I’ll be waiting for its next trading update before deciding whether to invest in Dunelm shares. Instead, I’ll be looking to purchase other shares that could benefit my portfolio with more certainty.

The post Could Dunelm shares be in further trouble? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Taylor Wimpey loses interest

Last month, the UK central bank opted to continue its rate hikes, bringing interest rates to 1%. Consequently, the mortgage rate has spiked to 4.1%, having spent the majority of last year at 3.6%. Worries that higher interest rates could result in a house market crash have spooked Taylor Wimpey investors into a sell-off.

Both Halifax’s and Nationwide’s data continue to show that house prices are on the rise. However, both companies have forecasted a cooling of house price growth as we head into winter. In fact, the cracks are already starting to mount. Since the second half of April, around one in 20 properties have had price reductions of 5% or more. This is an increase from one in 22 properties from March, sending the Taylor Wimpey share price lower.

Glass ceiling

Despite the expected cooldown in house prices, Taylor Wimpey can only grow so much. Management mentioned that output of houses have taken a setback due to expensive raw materials and supply chain bottlenecks. Moreover, higher inflation and a low unemployment rate is putting pressure on profit margins. This was evident in the FTSE 100 firm’s FY2021 results, as profit margins decreased 2.5% from two years ago. That being said, Taylor Wimpey provided a positive set of guidance for the year ahead.

Whilst interest rates have risen, they remain at historically low levels and, with good availability of competitively priced mortgages, we are experiencing strong levels of customer interest.

Source: Taylor Wimpey 2022 Annual General Meeting

Tough as bricks?

Even though scepticism fills the air around housebuilder shares, I think there might be a buying opportunity for me here. For one, renowned real estate agent Jeremy Leaf said, “Activity in the market at the moment is more determined by a shortage of stock rather than a softening of demand being prompted by the cost-of-living crisis.” This gives me reason to believe that house prices may just hold its weight despite a slow down in price growth.

Aside from that, Taylor Wimpey shares are also very cheap currently. The stock boasts an excellent price-to-earnings (P/E) ratio of 8, making it cheaper than the market average of 15. The British housebuilder also has one of the better dividend yields in the FTSE 100 index, at 6.6%. Paired with a flawless balance sheet, Taylor Wimpey’s fundamentals are extremely solid.

Nevertheless, I am wary that the Taylor Wimpey share price could continue to drop. The Bank of England forecasts an economic contraction to occur later this year, which will not do house prices any favours. Therefore, although there’s strong upside potential, Taylor Wimpey shares are too big of a risk for me to take, and I won’t be buying them right now. Instead, I’ll be looking to purchase other shares that could benefit my portfolio with more financial security in a potential stock market crash.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

April’s consumer price index has inflation pointing at 9%. With the FTSE 100 largely unmoved this year, not many of the index’s shares have managed to outperform the stock market. That being said, although 5% down this year, Burberry (LSE: BRBY) shares could be a potential hedge against inflation.

Luxurious inflation

The moat of luxury brands is their ability to thrive in high inflation environments. This is due to their inelastic demand and ability to pass on costs to customers. Higher prices are perceived as a status symbol, rather than a weight on the consumer’s wallet.

Burberry’s recent expansion in China shows how important diversification is in building a moat. While its European and Middle Eastern sales suffered last year from high inflation and Covid travel restrictions, its Chinese sales performed exceptionally well. Low inflation paired with an ever increasing number of consumer spending on luxury goods in China certainly helped the firm’s top line.

The yuan makes cents

The result of Burberry’s rapid expansion in China reflects in its income statement, as China is the company’s main revenue driver — Burberry has opened 224 stores in Asia Pacific. China’s increasingly affluent population is taking a bigger share in the world’s luxury market. In fact, the share of Chinese luxury consumer spending is now 21% of the global market, up from 11% just two years ago.

On the flip side though, China’s zero-Covid policy has resulted in several city-wide lockdowns. This has made growth volatile. Chinese sales figures were affected in Q4, with further impacts expected in this year’s first half.

Nonetheless, Burberry still posted positive results for the year. Despite the slowdown in China, both the firm’s top and bottom lines exceeded expectations. Additionally, Burberry gave a rather upbeat outlook for the year ahead. It expects revenue to grow at high single-digits, albeit with uncertainty surrounding China’s lockdowns. However, as China awakes from its lockdowns, I’m expecting the Burberry share price to recover and outperform the current inflation rate.

Long runway

Even though Burberry had a stellar year, I’m still wary of potential future lockdowns that could affect its share price. In spite of that, the retailer has shown its ability to outperform without the support of the Chinese market, as Burberry’s continued investment in digital channels has been vital to its success during Covid. I believe that Burberry has got a long runway of growth ahead with plenty of tailwinds for several reasons.

1. China is gradually lifting its lockdowns.
2. Travel is starting ramp up globally. As the brand generates a substantial amount of sales from tourists, this should help its top line.
3. The Supreme and Lola partnerships continue to attract more customers.
4. It introduced 47 new stores in FY 2022 with new concepts, and a further 65 planned for FY 2023.

Given these factors, I’m confident that the FTSE 100 share could turn green very soon. A modest price-to-earnings ratio of 17 and a decent dividend yield of 2.7% makes this stock a lucrative buy for me. As such, I’ll be looking to buy Burberry shares for my portfolio to hedge against inflation.

The post Can this FTSE 100 share hedge against inflation? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended Burberry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.