Green is the new black both on and off the catwalk for Burberry (Ashley Armstrong writes). The British luxury brand tapped the debt markets yesterday for the first time in its 164 years, launching a sustainable bond that will boost its liquidity and ringfence cash towards improving its environmental agenda, which includes building greener offices and shops and improving its sourcing of cotton.
When Tempus looked at Burberry last July, the luxury goods group was still in the tricky stage of asking investors to believe in the “brand heat” surrounding Riccardo Tisci, its new designer, and a turnaround that had been two years in the making already. At the start of this year, there had been small signs of encouragement that its plan to push more upmarket were paying off, with sales growth from young shoppers buying into its Nineties check-print revival. Then, just as Burberry could say that its shops were finally full of Mr Tisci’s new designs, the pandemic forced the closure of its stores around the world.
Burberry was one of the first British businesses to be hit because of its significant exposure to Chinese shoppers, who account for 40 per cent of group sales. In February a third of its 64 stores in China were shut, equivalent to 6 per cent of its store estate — but worse was to come. Within weeks, it had become clear that the coronavirus outbreak wasn’t an Asia-specific problem and by the end of March 60 per cent of Burberry’s stores were shut.
Predictably, shares in the company tumbled, from starting the year at £22.01 to a low of £10.17 in March. They have recovered slightly to £14.81½ — down 18½p, or 1.2 per cent, yesterday — valuing the business at about £6 billion. That means Burberry shares are trading at a price-to-earnings ratio of approxiately 30 times, according to analysts at Bernstein, which sounds punchy until it is compared with its luxury peers: Kering is trading at 34.8 times, LVMH is at 47.6 times and Hermes is at 68.2 times.
Despite the inevitable slide in its share price, Burberry’s balance sheet is strong, with a £300 million revolving credit facility, £300 million undrawn from the government’s loan scheme and £877 million of cash on the balance sheet. Its new sustainable focused unsecured notes, rated Baa2 by Moody’s, the credit rating agency, are expected to raise another £300 million or so.
During the first quarter of year Burberry’s sales had tumbled by 45 per cent, but by June sales had rebounded partially to be down by 20 per cent, as China and South Korea bounced back and as shoppers indulged in “revenge spending” — the term used to describe how consumers were quick to open their wallets after months of lockdown boredom. How Burberry has fared in Europe and America is less clear, but anecdotally city centres, including London’s West End, where Burberry has its boutiques, are suffering from a lack of office workers and tourists.
While shops continue to struggle, the shift to online shopping has accelerated. Now wealthy customers are used to buying online, this trend is expected to last and Burberry arguably is one of the leaders in the industry when it comes to modernising the shopping experience.
It has been at the forefront of investing in Snapchat, digital video games and last month opened a “social retail” store in Shenzhen, China’s technology capital, that blurs the boundaries between bricks and mortar and smartphones, which Burberry is betting is the future of shopping.
The brand is investing in the future, unlike some of its financially weaker rivals, and its savviness on social media will help to position its relevance with young spenders.
Advice Buy
Why Shift online will help to power Burberry’s turnaround
Halma
If its share price is anything to go by, Halma appears to be enduring the Covid-19 pandemic well, with its stock up 22.3 per cent over the past six months (James Hurley writes). Indeed, yesterday proved to be another solid day for the Amersham-based health and environmental safety products group, with its shares rising by 55p, or 2.5 per cent, to £22.70.
Halma’s performance initially looks a little gravity-defying. While annual results announced in July represented a remarkable 17th consecutive year of increasing revenues and profits, they came with a warning over 2021 earnings and pandemic challenges that look set to remain for a while yet.
Access to customer premises during lockdown or restrictions is an obvious problem for a business that needs to get on-site to install products, such as security sensors. Performance in its medical division has been muted because of limits on elective surgery, while lower oil prices are likely to dampen demand for its “process safety” business that serves the oil and gas industry, even if bosses have been working to diversify. Its infrastructure safety products could be hit by investment plans being put on hold or tht previously mentioned limited access to sites. Its shares also look punchy; Jefferies called them “priced for perfection” in July.
Against all that are some significant qualities that suggest the business should emerge from a turbulent period in solid condition. Playing to its strengths are trends such as population growth, the need to invest in infrastructure and to improve safety, improving environmental standards and meeting the demands of ageing populations.
Its management is respected and the majority of its products serve niches well protected by significant barriers to entry and are often “non-discretionary”, driven by things such as regulatory demands. The environmental business has performed well and looks strongly placed to continue to do so.
As analysts at Stifel have pointed out, the company’s focus on making the world safer, cleaner and healthier has never seemed more relevant.
Advice Hold
Why Short-term difficulties to overcome but strength should shine through
