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Are LVMH results positive for Burberry?

Investors in LVMH, the world’s largest luxury goods group, will be cracking open the Moët after its third-quarter numbers smashed expectations. Does this bode well for Burberry?

by
Garry White

in Features

10.10.2017

LVMH is the world’s largest, and arguably most diversified, luxury goods group. It owns brands such as Louis Vuitton, Celine, Guerlain, DKNY, Christian Dior, Fendi and Veuve Cliquot. Third-quarter numbers from the Paris-listed group were released last night and they beat analysts’ expectations. After adjusting for the impact of currencies and acquisitions, revenues rose to €10.4bn in the quarter to September, compared with a consensus view of €10.2bn.

This marks the start of the luxury reporting season, with Alexander McQueen and Gucci-owner Kering and standalone fashion houses such as Hermes and Burberry also reporting figures in the next few weeks. UK-listed Burberry’s interim numbers are out on November 10.

During the third quarter, all of LVMH divisions recorded double-digit revenue growth apart from its wines and spirits unit, which saw revenues rise a more pedestrian 4%, but this was put down to issues in its supply chain.  Overall, for the first nine months of the year revenues at LVMH rose 12% to €30.1bn.

Whether this upbeat performance will be repeated at Burberry remains to be seen. Its first-quarter trading update was solid but unspectacular, with currency moves flattering the numbers. Marco Gobbetti, its new chief executive, only got his feet under the desk on July 1, creating some near-term strategic uncertainty. Mr Gobbetti was previously chief executive of Celine, a unit of LVMH.

However, Burberry has underperformed for quite some time. The previous chief executive, Christopher Bailey, was not exactly spectacular in the role, despite being paid an astonishing amount of money. Fashion designer Mr Bailey is now back to being the just the chief creative officer instead of having two roles, a role he is likely to be better qualified to do. He probably never should have been given the role, as the skills to design handbags and clothing are markedly different to the skills needed to keep investors happy and keep a multi-national business on the right financial and strategic track. 

Indeed, margins are close to historical lows and its store floor space generally delivers lower sales than rivals. This means there is plenty of scope for Mr Gobbetti to make his mark and improve the numbers, particularly as luxury goods sales in the key Chinese market are now starting to improve. But Burberry’s relative underperformance has also made it a bid target – with speculation earlier in the year that US group Coach was considering an offer. Also, Belgian billionaire Albert Frère has increased his stake in the luxury retailer to 4% - and he has a history of encouraging consolidation.

However, Burberry isn’t cheap, trading on a current-year earnings multiple of 22.6 times. The shares have been boosted by the fall in sterling, as most sales are generated overseas. A premium by any purchaser will also be required. The company is one of the few luxury houses unencumbered by any family stakeholders, which would be helpful in a bid situation. However, there remains a lot to do at the group. The company needs more than a better-run supply chain and improved distribution systems. It needs a complete overhaul of its clothes and handbag range, which are looking tired. Indeed, Gucci branded products appear to be gaining in popularity over the brand in some circles. The company also needs more entry-level products to attract new customers at the lower end.

So, although things are looking fine in the global luxury goods space, Burberry’s management probably have much more to do before they can fully join the party.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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