Burberry: a trophy asset

Burberry is a trophy asset, says Alex Williams. But the fashion house would be a brave buy.


Burberry: a buy for the brave

Fashion house Burberry looks a bit rich, says Alex Williams.

Shares in fashion house Burberry, the UK's biggest luxury goods brand, jumped by more than 6% on Tuesday as speculation swirled around the identity of an unknown investor who has built a large position in the group. HSBC is holding a 5% stake in Burberry, but has not disclosed who it is holding the shares for, suggesting the investor is deliberately remaining anonymous. Burberry has engaged Morgan Stanley and advisory firm Robey Warshaw to defend against a possible takeover.

The company is seen by the City as a soft target. Despite its 160 years of heritage, Burberry is "one of the few" luxury goods brands that is not majority owned by its founding family, says Macquarie analyst Daniele Gianera. Brokers speculate that the buyer could be anything from an activist investor to a rival fashion house.

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French luxury goods giant LVMH has been aggressive in buying up rivals, making hostile moves on both Gucci and Herms, the silk and leather goods brand. Adding to the intrigue, LVMH, which has $4bn in cash, declined to comment on whether it is now pursuing Burberry.

An attack would be well timed. Burberry has ridden the China boom by rapidly opening new stores and 25% of its sales now come from mainland China, with a further 10% in Hong Kong. But a sharp slowdown in the country has left Chief Executive Christopher Bailey looking overexposed. Sales fell byan alarming 20% in Hong Kong last quarter, weighing on the share price.

At roughly 20 times earnings, Burberry is far from cheap. But in luxury goods land, that is not an outlandish valuation and the stock is less expensive than it has been, says Jonathan Guthrie in the Financial Times. Burberry has traded nearer 30 times in recent years and a sharp rally in its shares, up over 15% this year, suggests "furtive stake building".

The company is a trophy asset, but bidding for Burberry now would be "a brave buy", says Reuters BreakingViews. That is something LVMH's boss, Bernard Arnault, France's richest man, is famous for. But Burberry is already good at drumming up hype and online sales, so there is little a buyer could do to reverse a slowdown in sales. At current levels, its $8bn price tag would be "extravagant".