Goldman downgrades Burberry, slashes price target

Goldman said it continues to like the long-term growth opportunity at Burberry, but it has been too optimistic on the pace of the life-for-like acceleration and required levels of investment to support it, which delays its margin expansion thesis.

"Our prior positive stance on the investment thesis at Burberry was based on new product driving an acceleration in LFL growth and improved store densities, which in turn drive margin expansion," it said.

"Whilst management reiterated its £4bn revenue ambition in the trading update (12th January) we expect it will take longer than initially planned."

In addition, GS said the drop in profitability from prior expectations suggests greater investment is required to deliver the sales turnaround.

"On our revised estimates, we now look for 14.5% EBIT margin in FY24E (was 17.3%) which is a decline of 600 basis points year-on-year, or -450bp at cFX (versus -160bp prior on this basis).

"We expect the gross margin headwinds (higher inventory) and increased opex will likely mute margin expansion in FY25 and we now look for 14.6% EBIT margin in FY25 (+10bp y/y and compares to our 18.1% prior forecast)."

GS said it has been wrong in its investment thesis of Burberry, as demonstrated by the company's 29% underperformance versus the broader peer group over the past 12 months.

The bank noted that since being added to the ‘buy’ list in July 2021, the shares have underperformed the FTSE World Europe Index by 39% - they are down 34.1% versus the FTSE World Europe up 4.9%.

Goldman said the fundamental component of its 12-month price target is discounted cash flow-derived and declines 27% to 1,501p from 2,062p. This reflects (i) a 15% decline to its underlying earnings and free cash flow forecasts in its 10-year forecast period; and (ii) a -12% impact from increasing its weighed average cost of capital by 100 basis points to 10% to reflect the reduced visibility of earnings progression as the brand invests to re-accelerate momentum in a tougher macro environment.

At 1140 GMT, the shares were down 4% at 1,233p.