Berenberg downgrades Burberry on FX exposure

7th Apr 2014 09:42

Berenberg has downgraded its rating for high end fashion brand Burberry from 'buy' to 'hold', saying that recent strength of the pound will have a negative impact on its performance.The broker said that the estimated sales and earnings growth rates over the next three years are "less compelling". It has cut its target price for the stock from 1,660p to 1,500p.Most of Burberry's manufacturing facilities are in the Eurozone and China, with only two in the UK. Due to its cost structure and the regional concentration of sales, the company has exposure to sterling against the euro, US dollar and US dollar-pegged currencies such as the Japanese yen and Korean won, Berenberg said.The broker explained that Burberry regularly uses derivative instruments to hedge its exposure to foreign currencies. "The group enters into forward FX contracts to hedge cash flows in each major foreign currency. However, it does not actively hedge its translational risks, stating that it only 'monitors the desirability of hedging net assets of overseas subsidiaries', thus being directly exposed to foreign exchange fluctuations from a balance sheet perspective," Berenberg said.In 2012 and 2013, no hedging for translational purposes was recorded; the broker doesn't expect this to change this year."Currency-related earnings pressure for Burberry into 2015 is material, given the appreciation of GPB against the USD coupled with the depreciation of the JPY."BC