RBC reiterates 'underperform' and cuts target price on Burberry

RBC Capital Markets on Friday reiterated an ‘underperform’ rating on Burberry Group and cut its target price to 1175p from 1250p.

Burberry on Wednesday reported a 10% drop in full year adjusted profits to £421m as underlying revenue fell 1% to £2.5bn and like-for-like sales dropped 1%, dragged down by weak sales in Hong Kong and Macau. Adjusted earnings per share shrank 9% to 69.9p. The fashion retailer also warned that it expects 2017 full year adjusted profit before tax to be towards the bottom of the range of analysts' expectations.

RBC believes Burberry’s top line growth requires “sharper focus” on retail productivity, cost discipline and cash returns.

“Management is doing all the right things for the brand but this requires reinvestment, with operating expenditure deleverage leading to below-sector average earnings before interest and tax growth in the full year 2017,” RBC analysts said in a note to investors.

The analysts reduced their pre-tax profit forecasts for the full years 2017, 2018 and 2019 by 8%, 8% and 3% respectively. RBC said Burberry needs to invest in its digital offering to improve its financial performance.

“Reinforcing e-commerce makes sense and this will require further investment since competitors are playing catch-up; in the short term, Burberry's digital edge has not been enough to avoid weakness in the US/UK (where online penetration is higher),” RBC said.

Burberry said it would make £100m of cost savings and launch a £150m share buyback to help the business and investors cope with conditions that have remained challenging. However, RBC noted that the benefits of cost cuts would be gradual, with limited incremental net savings in 2017 and material upfront cash costs of £60m in the first two years.

The broker added: “A progressive dividend policy (full year 2017 dividend yield of 3%) and £150m buybacks (3% of market cap) may provide support but they are not enough to drive stock outperformance, which depends on retail like-for-like returning to positive territory to avoid further operating expenditure deleverage pain.”

Shares rose 1.30% to 1,093p at 1036 BST.