Broker snap: Credit Suisse downgrades Burberry on 'tough' short-term outlook

20th Jan 2014 09:59

Credit Suisse has lowered its recommendation for luxury fashion brand Burberry from 'outperform' to 'neutral', saying that the outlook for the stock looks 'tough' in the near term.The bank has reduced its earnings per share (EPS) estimates for the years ending March 2015 and 2016 by 4%, leading to a cut in its target price from 1,700p to 1,600p.This is as a result of foreign exchange headwinds and more conservative margin assumptions due to an upcoming change in the business model in Japan - due to the expiry of an apparel licence next year - as well as higher reinvestment."We now think that Burberry's superior top-line momentum is unlikely to translate into superior earnings growth versus its luxury peers over the next two years," Credit Suisse said.The bank believes that Burberry's revenues will grow at a sector-average compound average growth rate (CAGR) of 13% over the next two years "reflecting the remarkable momentum and long-term growth potential of the brand".However, it now forecasts a below-sector average CAGR in EPS of just 10%.Meanwhile, Credit Suisse believes that the transition of Chief Creative Officer Christopher Bailey to replace Angela Ahrendts as Chief Executive Officer could also limit upside for the stock with the switch-over expected to take place over the coming months."Given the strong team in place, we think the company under the new leadership of Mr Bailey should continue executing well a business strategy that has rewarded Burberry's shareholders nicely in recent years."But the fact that Angela Ahrendts will not be around to lead the company to deal with Japan may continue impacting sentiment and holding back its valuation in the short term," the bank said. The stock was down 0.2% at 1,512p by 10:48 on Monday.BC