When, several years ago, I last considered Burberry Group, I wondered how long this particular bubble could continue to inflate and concluded that there was no reason it should stop soon.
The reinvention of the brand over the past decade, and its penetration in fast-growing markets in Asia and elsewhere has meant a steady stream of new consumers willing to pay the sort of prices Burberry can charge. The company has also moved to get out of some licensing agreements, most recently in Japan, which allows a wider range of its goods to be sold.
That progress has been followed by the share price. Burberry shares bottomed out at less than £2 in late 2008; they have progressed in pretty much a straight line since, and added 45p to £18.29, close to their record high, on some mixed but encouraging figures for the second half of its financial year to end-March.
There are signs, though, that life for high-cost luxury goods producers is about to get tougher. Burberry’s like-for-like second-half sales growth beat expectations at 9 per cent, with double-digit rises in the Americas and in Europe and most emerging markets.
Asia Pacific was a drag, with falling sales in Hong Kong and Macau. This is its most profitable market and accounts for 10 per cent of sales and probably 15 per cent of earnings. It is driven by Chinese tourists coming to buy there, and they have been put off by the political protests, footfall declining by a fifth, though many are simply shopping elsewhere.
In Japan, earlier targets of generating £100 million of revenues and £25 million of earnings by 2017 will not be met because of a shortage of property.
The rising dollar has made Burberry products increasingly expensive in parts of Asia, and the company said yesterday its pricing would have to reflect that, not least because it is cheaper for retailers to buy in Europe and ship back to Asia. Burberry has plenty of experience managing this, but the inevitable conclusion is that Asian margins will fall. Chanel, not strictly comparable, has recently cut some of its prices.
The shares sell on 22 times earnings. Given the above headwinds, no reason to chase for now.
Annual loss from forex £25m
Seven Number of stores added in half
MY ADVICE Avoid for now
WHY Shares have had a stunning run, but there are signs that life is getting more difficult for luxury goods makers, especially in Asia
The purchase by JD Sports Fashion at the start of 2012 of the Millets and Blacks chains from the administrator always looked like a gamble, albeit a small one. The price was only £20 million, and the two chains’ revenues were negligible when compared with JD’s sportswear and trainers core business.
The company admitted yesterday that the turnround would be further delayed, until the 2016-2017 financial year, after further if diminished losses in the year to the end of January. The problem was the warm autumn, which left an awful lot of heavy coats still on the rails and needing to be discounted.
That core business, though, goes from strength to strength, its operating profits of £107 million up 17.6 per cent on last time.
JD is the go-to retailer for brands such as trainers that want an immediate high street presence, while its wide range is attractive to customers. There are three main drivers for growth, expanding further into Europe and online and the eventual chains.
JD shares added 29½p to 539p.They sell on about 13 times earnings, not bad for a retailer with such growth prospects. One to tuck away.
Group revenues £1.52bn up 25%
MY ADVICE Buy long-term
WHY Multiple is reasonable given potential for growth
Hunting has promised to keep the market informed more regularly on how its business is going, given the volatile conditions in the oil and gas sector where it gets most of its business. A pity there is no better news to report.
The company is about as well placed to weather the storm as any in the services sector. It has a strong balance sheet, a capital investment programme will come on stream to improve productivity just when the oil price might be expected to rise again, and Hunting has cut costs by getting rid of a fifth of its workforce since the start of the year.
As the company says, at some stage the market will recover. For now, first quarter operating profit is down by about 60 per cent against the same period last year, while its Drilling Tools operations in America and Canada are losing money.
The rest of the business is better placed. Its Dearborn and Subsea operations make products that are either essential and fairly cheap or are needed for deep-sea projects that are longer-term and less open to cancellation.
The number of American rigs has fallen by 46 per cent since the start of the year as shale operations are depleted, and some optimists believe supply and demand should begin to come into balance this summer. The shares, above £9 in August, added 14½p to 598p. They sell on 23 times this year’s depleted earnings.
Some super-bulls believe that the bombed-out values of service companies mean they could attract takeovers. This is not implausible, but it is no good reason to buy these shares at this stage in the cycle.
Profit decline in first quarter 60%
MY ADVICE Avoid for now
WHY Sector will take time to come back into favour
And finally...
A slightly disappointing trading update from Bunzl took a couple of percentage points off the share price. Brazil is suffering, while there are signs of pricing pressure in the United States. There is the usual clutch of bolt-on acquisitions, four this time. One broker suggests that Bunzl could be acquiring businesses with revenues worth £250 million to £300 million this year, important to justify the shares’ high rating. The company’s reputation for dull reliability means even the slightest slip-up will not go unpunished.
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