Yahoo Finance Seeking Value in Britain: Burberry
- By Mark Yu
Luxury goods maker Burberry (BRBY.L)(BURBY) last week delivered its numbers for the fiscal year that ended in March, reporting a 10% revenue increase to 2.8 billion pounds ($3.64 billion) and an unimpressive 7.3% profit decline to 287 million pounds - a 10.4% margin compared to 12.3% in 2016.
As observed, overall costs, operating expenses and taxation grew at the same rate as the company's revenue therefore resulting in overall profitability in the recent fiscal year.
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The intrinsic value of LSE:BRBY
"2017 was a year of transition for Burberry in a fast-changing luxury market. The actions we have taken to lay the foundations for future growth are yielding early benefits, and I remain confident that these will build over time.
"Marco Gobbetti assumes the role of CEO from July. With his extensive experience in the sector, we will build on these foundations to elevate and strengthen the brand further and take Burberry to the next level as a global luxury retail and digital business. I am excited to work closely with him in this next chapter." - Christopher Bailey, CEO and chief creative officer
Burberry ADR shares rose 5.2% while its London-listed shares rose lower at 4.08%.
Valuations
Burberry ADR traded at some premium compared to its peers. According to Reuters data, the company had a trailing price-earnings (P/E) ratio of 26.4 times vs. the industry figure of 39.8 times, a price-book (P/B) ratio of 4.5 times vs. industry figure 4.14 times and a price-sales (P/S) ratio of 2.8 times vs. industry figure 1.5 times.
The company had a trailing dividend yield of 3.05% with 81% payout ratio.
Average 2017 sales and earnings-per-share expectations indicated forward multiples of 2.7 times and 21.4 times.
Total returns
Burberry ADR outperformed the broader Standard & Poor's 500 index almost three times so far this year with 21.4% total gains vs. the index's 7.2%. The company, nonetheless, underperformed the index in the past half year with 2.7% gains vs. 15.4% gains.
Burberry Group
According to filings, Burberry was founded in 1856. The company is a global luxury brand with a distinctive British identity. Since its founding, the Burberry brand has built a reputation for design, innovation and craftsmanship. Further, with the invention of gabardine by Thomas Burberry more than 130 years ago, outerwear has been at the core of the business and remains so today - best expressed through the iconic Burberry trench coat.
Burberry designs, develops, makes and sells products under the company-named brand. Product design and development are centered in Burberry's London headquarters. Fabrics and other materials are bought from, and finished products manufactured at, both company-owned facilities in the U.K. and through an external supplier network, predominantly located in Europe.
In addition, Burberry products are sold globally through its stores and online at Burberry.com as well as through third-party wholesale customers, both offline and online. In a few selected areas, Burberry uses the product and distribution expertise of licensing partners.
In its previous fiscal year, Burberry generated 38% of its revenue from Asia Pacific; 35% from Europe, Middle East, India and Africa; and 27% from the Americas.
The Burberry board considers the group's business through its two channels to market: retail/wholesale and licensing.
Retail/wholesale
According to filings, retail/wholesale revenues are generated by the sale of luxury goods through Burberry mainline stores, concessions, outlets and digital commerce as well as Burberry franchisees, prestige department stores globally and multibrand specialty accounts.
In 2017, revenue in the retail/wholesale segment grew by 10.9% to 2.74 billion pounds or 99.1% of total Burberry sales, and generated an adjusted operating profit*** margin of 15.9% compared to 15.4% the year earlier.
***Burberry: The board assesses channel performance based on a measure of adjusted operating profit. This measurement basis excludes the effects of adjusting items. The measure of earnings for each operating segment that is reviewed by the board includes an allocation of corporate and central costs. Interest income and charges are not included in the result for each operating segment that is reviewed by the board.
Licensing
Licensing revenues are generated through the receipt of royalties from Burberry's partners in Japan and global licensees of eyewear, timepieces and European childrens wear.
In 2017, sales in the Licensing business fell by 41% to 24.9 million pounds - 0.9% of total sales - and delivered an adjusted margin of 87% - same as the prior year.
On average, Burberry sales had grown 6% in the past three years while profits declined by 3.7%. In addition, the luxury goods company had a three-year profit margin average of 12%.
Cash, debt and book value
As of March, Burberry had 843.5 million pounds in cash and cash equivalents and 34.3 million pounds in bank overdrafts and borrowings leading to a debt-equity ratio of 0.02 times vs. 0.03 times the year prior.
Of the company's 2.4 billion pounds in assets 7% had a book value of 1.7 billion pounds compared to 1.62 billion pounds in 2016.
Cash flow
Burberry's cash flow from operations improved by 36% to 560.7 million pounds in 2017. As observed, the company received higher cash flow coming from inventories, receivables, payables and provisions.
Capital expenditures, including intangible asset purchases, were 104 million pounds leaving Burberry with 456.6 million pounds in free cash flow compared to 273.3 million pounds in 2016. The company allocated 75% of its free cash flow for dividends and share buybacks, net any issuances, and had provided 64% on average of its free cash flow in such payouts in the recent three fiscal years.
Conclusion
As observed, Burberry has been able to generate more business in recent years. However, profitability has been declining - 13.8% margin back in 2014 and now 10.4% in 2017.
Burberry's only other segment and most profitable segment in recent years, Licensing, has failed to grow and therefore contributed to the company's profitability decline. In review, Burberry halved its licensing sales in 2017 because of a planned expiry of the Japanese Burberry license.
Nonetheless, Burberry has an admirable state of balance sheet - negligible debt followed by a growing book value. The company also has kept a well-balanced cash flow in operations whereby it has provided good amount of payout to its shareholders in recent years while requiring no (minimal, if any) debt intake.
Applying three-year sales growth and P/S multiple averages followed by a 20% margin would indicate a value of 6 billion pounds or 27% downside from today's market capitalization of 7.65 billion pounds.
In summary, Burberry is a pass at the current share price.
Notes
(1) Annual report
Burberry Group PLC is the parent company of the Burberry Group. Burberry Group PLC is listed on the London Stock Exchange and its principal business is investment. The company is the sponsoring entity of The Burberry Group PLC ESOP Trust and The Burberry Group PLC SIP Trust (collectively known as the ESOP trusts). These financial statements have been prepared by consolidating the ESOP trusts with the financial statements of the company. The purpose of the ESOP trusts is to purchase shares in order to satisfy group share based payment arrangements.
Disclosure: I do not have shares in Burberry.
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The intrinsic value of LSE:BRBY
