More on Burberry
Burberry
Burberry is the owner of the Burberry brand which is now used across a large range of luxury goods. The company retails and wholesales Burberry products as well as licensing the brand to other manufacturers. GUS owns a controlling (66%) share of Burberry.
Sales grew strongly in the first half of the current financial year, up 14% after stripping out the effects of currency, but growth slowed to 7% (on the same basis) in the third quarter. Retail sales growth was almost entirely driven by expansion with LFL growth low. In both wholesale and retail sales seem to be near saturation in the UK and slowing in many continental European markets. The most promising demand driver is East Asia where the brand is extremely strong and customers are very willing to pay premiums for brands.
Licensing rates rose in the first half and slowed in the third quarter (like everything else). Given what appears to be a one off boost in the first half we are uncertain what the sustainable rate of license revenue growth is but it is likely to be considerably higher than retail or wholesale for at least the medium term. Although licnseing revenues are compartively small (£39m out of a total of £321m first half revenues) they are high margin. Strong growth in licensing revenues should add over 1.5% to overall operating margins and operational gearing in wholesale should also improve margins there, but retail may not perform as well given low LFL sales growth.
The company expects single digit growth in wholesale and we expect retail to also grow in high single digits in the last quarter of the financial year. In the longer term we expect continued strong growth in Asia and continuing extension of the brand to new product ranges.
At the current price of 403p the rating is high with a prospective PE of 18× 2006 earnings. This reflects its strength as a luxury goods brand (particularly in Japan and the US). Brand extension (selling a wider range of products carrying the Burberry brand) and Asian demand makes high growth sustainable.
The brand may be weakened by continuing extension (a necessity for high growth, particularly of licensing revenues) but it is likely to be quite robust in its growth markets in Asia and North America.
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