Burberry on track with promising quarter in the bag

Burberry shares showed palpable relief after an unexpectedly solid advance in first-quarter comparable sales growth and the most promising underlying trend in China for at least three years.

Accessories and a new principal

Some investors may also be taking the group’s good news as an early win at the hands of just-installed CEO Marco Gobbetti. He has—officially—been killing time, for contractual reasons, in a lesser role based in the Asia-Pacific region, since January. Any compounded good sentiment will be welcomed by management given growing risks that increasingly fervent hopes about the former LVMH executive might be exceeding near-term possibilities. Regardless of which managerial factor the firming sales can be attributed to, there’s little doubt that a 4% rise in like-for like sales against forecasts averaging 2.3% represents the best sign of a potential group sales rebound for several quarters.

Gobbetti fans may not be only ones feeling vindicated this morning. Burberry’s newest ranges and leather goods were the stand-out products in the first quarter, reducing concerns among some investors about potential C-Suite tensions following the sideways progression of former CEO Christopher Bailey to a full-time creative leadership role. Leather spans all product ranges and accessories, Burberry’s highest-revenue category, which was also bolstered by the £1,795-£2,495 DK88 handbag range. Revamped management has had, overall, a fruitful first quarter, though the CEO has taken care to remind in his first printed official comments, which name-check Bailey that he’s “mindful of the work still to do”.

Americas still cupped

The first chunk of work that has been cut out for him will be to fix the Americas. There, another decline followed those in the second half of the previous financial year, albeit weakness might be moderating given the “low single-digit” fall compared to the 10% wholesale/retail slide in 2016/17. Relative improvement might be attributable to the failure of the U.S. dollar to hold on levels marked last November that were its highest for over a decade and which Burberry said encouraged U.S. buyers to shop overseas. Seen another way though, the muted impact of that pattern on rivals thus far hasn’t been lost of investors. Reduction of such pressures could just as easily benefit Burberry competitors anew, underlining that its Americas strategy still cries out for structural changes.

China stars

A potential return of strength in mainland China however would be the group’s chief milestone under its new management structure. On the surface the mid-teens percentage growth there in Q1 could still be seen as due to seasonal trends or other factors beyond the group’s control. The rise looks more sustainable, however, if doubled ‘digital’ China revenues are factored in. The buzzword has been a pointed management outlook focus for the last 18 months.

Burberry’s more robust showing overall is underpinned by the group’s ‘on-track’ rating for the cost savings programme that eyes £100m pa by 2019, retention of full-year profit guidance, and even reduced negative currency impact (£25m vs. £30m before).  All in, the group looks to have slightly more than grown into a relatively modest forward rating of 19 times next year’s earnings in the first quarter.

It’s tempting to see current key technical factors of Burberry’s share price as running counter to Wednesday’s sales rebound theme, though we’re more inclined to see consolidation as having largely passed.

• The shares were now down 1.4% for the year at last check having declined well over 10% from the year’s peak at 1879p on 31st May
• By sight, arguably overcooked valuation and flattering currency impact have been discounted, taking the stock to key 1567p support that was formerly resistance, chiefly on a day of a sizeable spike on 21st October last year. The price is also in near confluence with the 38.2% Fibonacci interval of Burberry’s June 2016-May 2017 uptrend
• Iterations of the 1587p pivot effect are visible from its top side in January, and again during a mid-April-mid-May consolidation. From there, the stock launched a bid for the year’s prior high of 1838p, which was eventually superseded, albeit only temporarily
• Furthermore, 1567p was the embarkation point of Burberry’s latest up leg, which has stalled at the 21-day exponential moving average (MA), whilst the 200-day MA underpins Wednesday’s trading. It’s significant that the stock was cradled on Wednesday between what many traders regard as traditional short- and long-term trend indicators
• Overall, we’re minded to see the stock as supported here, particularly given that the completion of recent consolidation is also indicated by rebounding Relative Strength Index momentum (sub-chart, red line) on the cusp of its overbought boundary
• Our optimism would need to be reassessed if the stock loses structural and observed supports, (200-day MA and 1587p)
• Additionally, the share’s destruction of the June 2016-May 2017 uptrend is also problematic. The trend line could now present challenges from its underside and resistance is also highly likely at 2017’s high

DAILY CHART: BURBERRY GROUP PLC.

Source: Thomson Reuters and City Index