Burberry: Another Profit Warning

When you find one cockroach, you can be sure that there won't be just one.

The timing might be coincidental, but Burberry issued a new warning after yesterday’s defeat of the English team in the European football championship.

It’s rare for us to cover earnings releases from companies we don’t have a position in, but given our sizable exposure to high-end luxury, there’s a lot to learn from Burberry’s dismal performance. Simply stated, it’s been nothing more than just a value trap with massive volatility.

Following the above Q1 update, the stock is down 17% today, dragging many other luxury stocks down as well. Burberry is now trading 47% lower than at the beginning of this year. The CEO is being dismissed, the dividend is being scrapped, and an operational loss (EBIT) is expected in the first half of Burberry's fiscal year if the current trends hold.

Burberry

Burberry aims to reconnect with its core customer base, rebalance the product range by offering a broader selection of everyday luxury products, refine its brand communication, revamp its website, and cut costs. These actions should turn the ship around in the second half of its FY25.

Interestingly (though not unsurprisingly) Burberry also called out sector-driven weakness.

We are operating against a backdrop of slowing luxury demand with all key regions impacted by macroeconomic uncertainty and contributing to the sector slowdown.

Now, even before the doldrums, there wasn’t much in the Burberry investment case that could have appealed us anyway.

ROIIC, reinvestment rate, operating cash flow performance, and profitability: four key quantitative factors to look at, and relatively easy to calculate. Even during the better times, Burberry screened rather poorly on what we define as true quality growth.