Burberry rallies on Goldman upgrade

28th Jun 2019 12:22

(Sharecast News) - Burberry got a boost on Friday as Goldman Sachs upped its stance on shares of the luxury fashion company to 'neutral' from 'sell' following underperformance, cutting the price target to 1,800p from 1,855p.GS noted that Burberry has underperformed its peers in the luxury segment by 10% over three months due to a lack of consensus earnings upgrades in "a strong luxury environment".It pointed out that Burberry now trades on a CY20E price-to-earnings of 22x and 15.8x EV/EBIT versus the sector at 23.8x/16.2x, meaning the valuation is now supportive. Since being added to the bank's 'sell' list back in March, the stock is down 9% versus the FTSE World Europe up 6%, it said."While we continue to see downside risks to consensus (higher investments to support new growth initiatives), we now see an FX tailwind in FY20 and a price-to-earnings discount to peers, and move to neutral." It said the success of the company's new product remains key but patience is needed. "While we expect brand initiatives (monthly drops, new handbag collection) to drive higher traf?c, we now look for 1Q20 like-for-like sales growth (due July 16) of 1% (was 3.5%)."Goldman expects Burberry to increase investments to support growth after three years of underperformance."Brand initiatives (new product/creative talent, a new logo, store refurbishments) are a once-in-a-multi-year event, and we expect Burberry to allocate suf?cient resources to drive growth," it said. "Over the next three years, we forecast 4% per annum retail growth (was +6%) and circa£160m of incremental investment."GS said this may be conservative in the context of its assumption of around £450m-a-year average spend by Gucci and Louis Vuitton over this period. At 1220 BST, the shares were up 4.3% at 1,866.50p.