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Why Burberry’s woes may be good news for investors

A shock profit warning from the luxury goods maker has sent shares plummeting 22%, but for managers at Schroders and Franklin Templeton it could be no bad thing.

Why Burberry’s woes may be good news for investors

Burberry’s shock profit warning has caused its shares (BRBY.L) to plummet 22% today, as the luxury good maker faces tough market conditions and consumers rein in spending.

Group chief executive Angela Ahrendts announced to the market that as sales slowed the group will now have to cut its costs, and she expects profits for the year to scrape in at the bottom of market expectations.

However, Richard Buxton, head of UK equities at Schroders, isn’t so concerned about the company’s woes.

‘In a funny sort of a way I’m almost more relaxed, as my concerns about Burberry haven’t been about sales. In the short term trading will be what it will be, with slowing global activity,' he said.

‘But I have been a little bit worried that they have been doing so well and generating so much cash, and they’ve got cash on the balance sheet, that maybe some of the discipline on cost control was slipping a little bit.’

Buxton manages the Schroder UK Alpha Plus fund where Burberry makes up 2.9% of the portfolio, which features in Citywire Top Stocks, and the Schroder UK Growth fund, an investment trust with a 3.3% holding in the luxury goods maker.

The shares popped into the top-10 holdings of the Schroder UK Alpha Plus fund earlier this year.

‘[Burberry] sort of bounced in and out of the top 10. I added to it at very start of the year. It had rallied 30% by the end of March, and I actually sold the bit I had added.’

Mark Hall, manager of the Franklin UK Select Growth  fund, also says the fall in the shares hasn’t deterred him from investing in the stock after buying into the company in July this year when shares dipped on slow first-quarter sales growth.

‘We bought this stock at a 25% discount from a recent high, and see it as a long-term growth stock within the portfolio. Clearly, there are some headwinds, but management have done a good job building the brand and the balance sheet remains strong,' Hall said.

‘The position we took was a very small proportion of the total assets under management within the fund. We will analyse any further price weaknesses and may even look to add to the stock.’

Buxton sees Burberry’s market warning as a responsible move. ‘The fact that they’ve had to announce that sales have slowed and profits will be slightly lower than expected, does mean that will force the focus back on costs and managing the business tightly and so it could be the classic stich in time that saves nine.’

10 comments so far. Why not have your say?


Sep 11, 2012 at 19:33

Glad Mr Buxton is not managing my money...

If I had Burberry in a portfolio and it was down 20% I might say something like 'sorry' to my investors?

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J M Turner

Sep 11, 2012 at 20:14

I am new to share dealing, and I wondered if someone could explain to me why after so much growth over the last 5 years and a D/Y of only 1.8%, why would a share like this be attractive to an investor?? I was always told to look at a D/Y return of over 4%??

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Sep 11, 2012 at 20:25

"May be good news for investors"? The trend line for Burberry's shares has been firmly down for the last six months. The shares lost 26% between April and July, and have now lost a further 5%. Do the "professionals" never operate a stop-loss policy?

Almost anything can be seen as a "long-term growth stock" with "headwinds". If you never sell it, you never make a loss.

If you want something done, do it yourself. I sold my Burberry shares at 1265p. They are now 1088p. I would need a load of convincing that I didn't do the right thing.

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Sep 11, 2012 at 20:41

Mr Turner - "So much growth over the last 5 years" = "attractive to an investor". That's all you need to know.

Your 4+% dividends may well come at the expense of a 10% capital loss. Buy a copy of The Times. Go to the page at the end of the Business section which list share prices and dividends. Highlight all the dividends over (say) 4.5%. Put those in a dummy portfolio somewhere on the web (I use Moneyextra, but there are lots of others) - buy a nominal £1,000 of each share. Monitor them for 6 months. A few of them will do very well. Most of them will lose money, even taking the dividends into account. That's not what I call investing.

Capital gains will beat dividends 10 times out of 10. Capital gains are also taxed less heavily than dividend income, because you are allowed a higher capital gains tax allowance each year.

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Sep 11, 2012 at 21:24

If it is such a good long term growth, why was Burberry dropped from Citywire Top Stock list in August?

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Jeremy Bosk

Sep 11, 2012 at 23:11

It is a recurring fantasy among growth investors that there is a vast universe of stocks that will grow at double digit rates forever. That is more or less what would be needed to justify Burberry, Apple and many others.

In the 1950s and 1960s it was the Nifty Fifty stocks that were must buys at any price. Burton Malkiel's book, A Random Walk Down Wall Street will disabuse you of many such quaint notions.

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Sep 12, 2012 at 11:26

Strong balance sheet, huh?

I want to see the performance of Mr. Buxton if he is willing to pay 18 times earnings (after the price drop) for a strong balance sheet alone. Such valuations must be supported by a strong balance sheet AND growth. I can buy a strong balance sheet of a utility company for 4 or 5 times earnings.

I also find it funny how they use this opportunity to help their ego and comment on how much they made on some small trades earlier in the year (or the "discount" they bought it at - sic!), but do not comment on how much they have lost so far on this investment as a whole.

Congratulation on good timing Mr. Hall and your discount purchases, haha.

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jon d

Sep 12, 2012 at 15:32

Personally I can't see what anyone sees in shares like this. The company is all smoke and mirrors, just some ad men in front of some sewing machines. I like to try and put my money where it's put to uses that have more of a social component.

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Jeremy Bosk

Sep 12, 2012 at 15:55

Shares like this can make you money as well as lose them if you are a momentum trader. I have found that trends are only any use at all in strongly trending markets when shares with high alpha outperform (or underperform) the market. Chartists claim to spot this scientifically. I just call it gambling and have not done it in the last few years of largely directionless markets. There is no fundamental case for buying such shares although there may be a fundamental case for shorting or for a pairs trade. Perhaps some of the other high PE retailers have not yet factored in the collapse of consumer demand for fashionable fripperies. I don't know if they have or not, not having the cash to spare to motivate me to check.

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Jeremy Bosk

Sep 12, 2012 at 16:16

Just caught up with this excellent article on Citywire which is about small cap growth stocks. It makes sense to me and I actually own Raven Russia:

The author implicitly agrees about avoiding stratospheric PEs.

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