Burberry cut to 'underperform' from 'sector perform' by RBC

RBC Capital Markets cut Burberry’s rating to ‘underperform’ from ‘sector perform’ on Thursday, saying it expects the retailer's full year earnings in 2017-18 to be below the sector average.

However, the broker raised its price target to 1,300p from 1,275p as it said the luxury fashion group’s “equity story is evolving towards a more moderate top-line growth profile”.

RBC also increased its full year 2016-17 pre-tax profit forecasts by 2% and 7%, respectively, solely on favourable foreign exchange movements since mid-January.

“Management continues to do all the right things for the brand in the long term, but the combination of operating expenditure-deleverage, performance related pay reinstatement and a further drop in Japanese licensing revenue should lead to further margin pressure and below sector-average earnings before interest and tax (EBIT) growth in full year 2017-18,” said RBC analysts Rogerio Fujimori, Richard Chamberlain, Piral Dadhania and Claire Huff.

Burberry's compound annual growth rate is expected to be 4% versus 8% for its luxury peer group.

RBC has forecast adjusted EBIT of £438m for 2017, up from a previous estimate of £409m, and £454m for 2018, compared to an earlier projection of £436m.

The analysts hailed Burberry’s strategic focus on digital and said it continues to see the brand equity strengthening.

They also noted that management has been addressing legacy issues and investing in brand promotion.

“But this comes at a cost at times when demand for its all-important Chinese cluster is weak,” the analysts warned.

Key risks include further weakening of the pound against other key currencies, bigger-than-expected cost cutting in 2017, a large share buyback and potential corporate activity, RBC said.

Shares fell 0.39% to 1,286p at 1020 BST.