Jefferies cuts recommendation on Burberry despite bumper first quarter

Jefferies has downgraded Burberry, despite the luxury fashion brand reporting a bumper start to the year.

Shares in the FTSE 100 retailer surged 14% on Tuesday, after underlying first-quarter sales rose 4%, well above analyst expectations for around 2%.

Under new chief creative officer Riccardo Tisci, Burberry is looking to reposition itself as a more upmarket rival to fashion giants like Gucci or Dior. It has recently introduced the hugely popular Monogram collection, featuring a new logo based on the initials of founder Thomas Burberry, which boosted first quarter sales.

But Jefferies argued that visibility remained limited, which made the stock look expensive.

Analysts Flavio Cereda and Kathryn Parker said: “Much as we remain supporters of Burberry’s management strategy, we think the stock now prices in a very optimistic scenario and trades at a significant premium to peers in the absence of a very strong 2020-21 performance – it needs close to double digit like-for-likes to even justify this today.

“Visibility is limited and the magnitude of ongoing challenges do not support this premium at this time. We increase our price target by 11%, to £20, but cut our rating to ‘underperform’ as a pure valuation call.”

Jefferies previously had a ‘hold’ rating on the stock.

The bank also pointed to misleading comparables, “as they entail benchmarking an aggressively launched new logo in its infancy versus a time of lacklustre and directionless performance”, and said challenges remained in leather goods, a core market for Burberry.

As at midday BST, shares in Burberry were ahead 3% at £23.43.