The Burberry share price looks like a good bet
The Burberry share price could be on the verge of a major upswing as the firm’s profits return to growth.
The performance of the Burberry (LSE: BRBY) share price over the past four years has been like the film Groundhog Day: there have been several surges, only for it to subside to its original position.
In both 2018 and 2019, Burberry shares briefly shot up but then relinquished their gains.
Similarly, the Covid-induced collapse in the Burberry share price in early 2020 was followed by a long rally. Then came yet another slump before an ongoing uptick left it at the same level it was at the start of 2018.
Can the company find a way to break out of this stop-start cycle, or are investors doomed to keep repeating history?
The outlook for the Burberry share price
At present Burberry is facing two main problems, one short-term and one more fundamental.
Firstly, Chinese lockdowns caused sales in the country to fall by a third year-on-year in the second quarter of 2022, leading to a 16% decline in the Asia-Pacific region. This is important because the region now accounts for a majority (52%) of Burberry sales.
While this is a problem for all luxury-goods companies, which have hitherto relied on Chinese sales to power growth, there are also longer-term concerns that the Burberry brand has become stale and lost its way, losing the distinctiveness that had made it competitive with rivals such as Gucci.
Burberry’s improving outlook
Still, there are some positive signs. Firstly, as the company has itself noted, sales continue to grow strongly outside China, rising by an annual 16% on a like-for-like basis in the second quarter.
At the same time the group should receive a further boost from the weak pound, which means the money that Burberry earns from overseas will be worth more in sterling.
At the same time, Burberry has recently taken several steps to regain the foothold that it lost, hiring the highly-regarded designer Daniel Lee. While there’s no guarantee that Lee can turn things around, it’s important to remember that only a decade ago Burberry’s clothes had a very poor reputation.
If they can regain their cachet, then the prospects for the Burberry share price look bright.
Even if China’s growth permanently slows after it inevitably lifts its restrictions in the near future, economic development in other emerging markets should increase the potential size of the market for Burberry’s clothes and accessories (as well as those of the fashion industry as a whole). In that case, Burberry’s current valuation of 15.5 times forecast 2023 earnings, with a dividend yield of just over 3%, looks like a bargain.
Indeed, the recent changes already seem to have given the Burberry share price some momentum.
The stock is trading above its 50-day and 200-day moving averages.
I would therefore recommend that you immediately go long at the current price of 1,900p at £1.50 per 1p. I suggest you set a stop-loss of 1,280p, which would give you a total downside of £930.