A commentary from Sean Peche, Portfolio Manager at Ranmore Fund Management. Sean and his team monitor several global sectors, including luxury brands. Recently, they’ve been monitoring Burberry Group plc (LON:BRBY), which has been making headlines after reports that it is cutting hundreds of jobs, sales have fallen 21% year-over-year in the first quarter, and it will suspend its dividend. On the heels of earnings, the company also announced it is ousting its CEO, Jonathan Akeroyd.
The market has not responded kindly. Burberry's stock is down 24% since the news and 49% so far this year.
Sean Peche, Portfolio Manager at Ranmore Fund Management, comments,
"As a value guy, I’m scared of high prices, and so I have always struggled with luxury goods companies. I guess I’m not sure I’d look good in a Burberry Bucket hat.”
“And at £320 a piece, I am not about to "check" " but Luxury goods companies are quality businesses founded hundreds of years ago with wide moats.”
“Yes, but many Banks pre-dated them, and it’s much easier to launch a luxury brand today than a bank. Now I agree that many “have been” quality businesses (past tense) - Burberry enjoyed average Gross margins of 69% and ROEs of 22% over the past 10 years.”
“But those variables haven't stopped the share price from falling 72% since April ‘23 highs to 13-year lows. Things change, and we want to be alert to change.”
“So, yes, they WERE outstanding businesses when interest rates were low, and money was free, but maybe those days are over. Perhaps today’s environment of higher interest rates favours banks.”
“Do you know that the European Banks Index has beaten the Goldman Sachs European Luxury Goods index by:
- 48% over 1 year
- 66% over 2 years
- 71% over 3 years
- 13% over 5 years.”
“Banks aren't widely considered "quality" businesses, but it seems their business models offer better earnings predictability than luxury goods companies today.”
“Ok, but hasn’t Luxury already taken the pain with the shares down a lot?”
“Maybe, except Kering said in April, taking into account the deterioration of its revenue trends, the Group now anticipates a decline of 40 to 45% in first-half 2024 recurring operating income compared to the first half of 2023.”
“This week, Burberry warned, “The Luxury market is proving more challenging than expected” and “The weakness we highlighted coming into FY25 has deepened.”
“Even the mighty Richemont only reported 1% sales growth for the June quarter, and just because the share prices are down doesn’t mean they offer value.”
“The Luxury Goods index is still trading at 24x earnings - the European Banks index is trading at 7x.”
“Remember that your return comes from 3 sources:
- Earnings growth
- Dividends
- Re-rating.”
- “Earnings growth seems off the table for luxury goods
- The dividend yield for most companies is below inflation
- And earnings multiples hover around 20x.”
“Compare that to European banks where:
- AI cost savings, a resilient consumer, and buybacks could help earnings growth
- Many have dividend yields above 7%
- And their mid-single digit PE ratios offer some re-rating potential.”
“So we'd love to buy luxury goods companies. But only at the right price - offering real returns.”
“So do you think Value will beat Quality from here?”
“Yes, I think so. I know it hasn’t for the last 10 years. But things change.”
Disclosure
Ranmore Global Equity Fund holds 0% of the companies mentioned. The content of this marketing material is provided for information purposes only and is not advice. Past performance is no guarantee of future performance.