Bank of America downgrades Burberry on FX, Japan headwinds

21st Mar 2014 13:55

High end fashion group Burberry was under selling pressure on Friday after analysts at Bank of America Merrill Lynch lowered their recommendation on the shares from 'buy' to 'neutral'.The bank, which also slashed its target price from 1,740p to 1,500p, said that currency movements and the integration of Japanese operations following an apparel licence expiry are headwinds that are "too big to ignore". After adjusted its Burberry forecasts for recent currency moves - notably strength in the pound and euro - BofA has found that while 2015 revenue will be affected by 3-5%, the adverse impact on profits is much larger given that 65% of costs are denominated in pounds and euros.The bank has lowered its earnings per share forecasts for 2014-2015 by 4-11%.As for Japan, BofA said that the region is "essentially an untapped 'luxury' market for Burberry and direct control likely to prove brand enhancing". However, the integration will also impact the bottom line as the high-margin licence revenues disappear. Retail and wholesale business also takes time to "come to scale", it said."For 2015 we forecast 10% revenue and 13% earnings before interest and tax (EBIT) growth at constant FX, however this is almost entirely offset by the currency headwind as EBIT growth from continuing operations falls to only 1%," the bank said.BofA believes that the stock's premium valuation to the sector will limit its outperformance in the near term.The shares were down 2.2% at 1,389p by 14:53.BC