UBS cuts Burberry to 'neutral', says risk/reward now balanced

Luxury fashion house Burberry was under the cosh again on Friday as UBS downgraded its stance on the stock to ‘neutral’ from ‘buy’ and cut the price target to 1,800p from 2,110p following the company’s update a day earlier as it now sees a balanced risk/reward.

The bank said Burberry has been its preferred turnaround name in European luxury given the opportunity to structurally improve sales densities, drive cost efficiencies, and run a more efficient capital structure.

“The strategic update unveiled by the new CEO suggests that the long term opportunity to improve sales densities remains via reshaping product, upgrading distribution, and focusing on digital.

“However, the costs (both opex and capex) to do this will be higher, and for longer, than we expected,” it said. As a result, the bank cut its FY19 EBIT estimate by 12% and its FY20 estimate by 17%.

“The payback of this investment will be improving like-for-like growth, but visibility is limited here with no creative director even yet announced.”

On Thursday, Burberry's new boss vowed to move further upmarket in search of stronger profit margins after the fashion brand announced the departure of design guru Christopher Bailey.

Marco Gobbetti, who became Burberry's chief executive in July, said the brand needed to be entrenched "firmly in luxury enabling us to deliver sustainable long-term value".

At 1410 GMT, the shares were down 2% to 1,751p.