Burberry slides but brokers say keep the faith

15th Nov 2011 07:24

Brokers generally gave interim results from Burberry, the luxury fashion retailer, the thumbs-up but traders banked profits on the stock after its recent good run. The company saw underlying profits before tax rise 26% to £161.6m in the six months to the end of September from £128.5m at the interim stage last year.Revenues, at £830m, were p 29% on the first half of 2010 and in line with the sales update given last month.Earnings per share rose from 21.1p to 26.9p although net cash was down slightly on the same point of 2010 (£174m versus £181m).The interim dividend has been raised by 40% to 7p per share.These strong numbers seem to be broadly what investment analysts had been predicting, if not a little higher, following a series of impressive management updates this year; Charles Stanley and Credit Suisse had both forecast profit before tax of £159m. The sales figures had been released in the October trading update so what brokers were really interested in, apart from the profit figure, were operating margins, cash flow and news on strategy.On the retail/wholesale side, operating margin hardened to 14.9% from 14.8% the year before. With the licensing business included, the operating margin was 19.5%, down from 20.2% a year earlier; the Licensing division enjoyed an operating margin of 85.5%, down from 86.7% at the interim stage last year. The gross margin for the whole group rose to 66.7% from 64.3% in the first half of fiscal 2011. For the full year, Burberry continues to expect a "modest" improvement in retail/wholesale operating margin.Net cash at the end of September was £174m, down from £181m a year earlier. The major cash outflows in the first half included capital expenditure of £63m (2010: £47m), a seasonal working capital outflow of £108m (2010: £62m), tax of £49m (2010: £35m) and dividends of £68m (2010: £46m). In addition, £42m was contributed to the Employee Share Option Plan (ESOP) trust which has purchased shares to satisfy historic share scheme awards. There was no change to full-year guidance from that given in October, which may have been the reason why the stock came under selling pressure. Planned capital expenditure remains in the £180m to £200m range for the current fiscal year, with a continued focus on flagship store openings and refurbishments in high profile markets.Commenting on the results Angela Ahrendts, Chief Executive Officer, said: "Burberry has delivered a strong first half, reflecting our continued investment in innovative design, digital marketing and retail strategies."She acknowledged however the current financial instability stemming from the Eurozone debt crisis: "We remain mindful of, and prepared to react to, any local or global uncertainties as we drive for long-term sustainable growth."The shares fell back on the results, but broker commentary was generally positive, though Merchant Securities expressed its disappointment that the outlook statement merely reiterated the October statement."We believe demand should be supported by the domestic and travelling consumersfrom the Middle East, Asia and Russia, as growth of high end customers increases to reflect demographic evolution," the broker said, in a note which reiterated its "buy" recommendation.Investec was not bothered by the lack of an update to full year guidance; in fact it regarded it as a positive sign, as "while mindful of the risk, [it means Burberry has] yet to see any significant change in the demand outlook."The broker continues to view the shares as a long-term buy.Seymour Pierce is also a fan. "While slightly better than our first half forecast, given the global macro uncertainty currently, we are maintaining our 2012 pretax profit forecast of £375m (consensus £373m)."Despite the market's cool reaction to the results, Nomura has upped its full-year numbers, saying it sees "significant growth potential ahead".The broker raised its full-year adjusted pre-tax profit forecast by 1% to £372m, expecting "higher retail comp [comparable] store sales growth slightly offsetting higher cost growth". Nevertheless, the broker kept its neutral stance on the stock on valuation grounds. A 1,356p target was retained.BS/JH