A feeling of confidence is buoying the spirit of luxury brands, the people who work in them and those who work alongside the luxury industry in supporting roles. What gives luxury brands hope is the growing wealth class. Those who can afford luxuries have more money than ever to spend on it. Capgemini, in its World Wealth Report 2018, reported global High Net Worth Individual (HNWI) wealth rose 10.6% in 2017 to surpass $70 trillion, the first time it has reached this level and following six consecutive years of wealth gains.
The weakness of the pound at present and its decline over the last year has caused the UK and its luxury brands to look incredibly attractive to these foreign retailers.
Results wise, Burberry have had a strong period. Total revenue declined 3% year on year to £1.22bn in the 26 weeks to the end of September, but like-for-like store sales were up 3%, spurred on by growth in Asia – a result of a weaker pound attracting wealthy shoppers. Profit before tax rose 36% to £174m after accounting for £33m in restructuring costs and £28m related to the disposal of its beauty business, beating company expectations of £169m. The fashion brand’s cash flow was down to £647m from £654m last year, which it said was due to growing inventory. Basic EPS rose to 31.9p from 21.5p, while the dividend per share remained unchanged at 11p.
This announcement was preceded by the arrival of new chief creative officer Ricardo Tisci, who has helped with a revamping of the brand. This started with a new logo, a reduction of waste and making the company fur-free. The new collection has received exceptional response despite the fact that most products won’t reach stores until February.
The initial response from influencers, press, buyers and customers to their new creative vision and Riccardo’s debut collection ‘Kingdom’ has been exceptional, which is why we see growth potential in Burberry over their peers.
The excitement around this new direction has caused us to pick Burberry as our favoured stock in this sector.
We have an initial price target of 2100 GBX, giving a potential upside of 19% and a possible yield of 2.34%.