Despite a 4% odd share price fall in Burberry (BRBY) shares, the price is still a tad ahead of my optimistic call a couple of months ago. I was not too surprised to see it reporting a rough sales quarter, although you can guess the spin e.g. 'trends improving through quarter' i.e. -45% in Q1 fully but 'just' -20% in June! It was better to hear that 'leather goods full-price sales up strongly in Mainland China and Korea', as ultimately one of the most positive themes for the stock is that getting on for 40% of sales are in this geographic region and is highly likely to rise to a majority of sales over time. Nevertheless, despite East Asia emerging out of pandemic fuzz quicker than other parts of the world, Burberry still expects its Q2 sales to fall 15-20% and gross margins year-on-year to fall, although analysts will have to fill in the gaps to forge a formal forecast.
My view remains akin to my conclusion from a couple of months ago, namely: 'Pitch it forward a year or two and the company should have no problem in returning to its profitability level of £400 million+, putting the shares today on a prospective low teens earnings multiple. With sales increasingly centred on faster growing parts of the world, I think the future is still bright for the company in the 2020s – and it may not be independent by the end of this decade given the rate the luxury behemoths of France and Italy have been acquiring brands. My perception is tucking the shares away for the longer haul remains smart. Just do not expect me to announce I have bought something at one of their stores'.
Now onto ASOS (ASC), which talked about being 'agile and dynamic' on its conference call covering the last few month's trading. It also talked about 'being much better capitalised' and certainly anyone who supported the money raising at £15/share back in the early days of the lockdown has been handsomely rewarded, so handsomely that today the company's market cap is up to a mere £3.5 billion. Bigger again than boohoo (BOO)! On the latter, the company said it has not seen any huge benefit from customers switching from its big peer. As for the allegations and related, it would not be drawn but did note how right-on it has been with communication and structure. So I guess that means a commitment to no sweatshops then... So how about water use and ravaging cotton consumption? I am being a bit hard, because I think ASOS is a bit of a different beast to boohoo – to its chagrin over recent times as it had been materially underperforming via the share price indicator and headline capabilities re operational stuff such as warehouses until recently. It is looking all a bit better now though...and I bet the seven factories that supply ASOS which are based in Leicester/the UK have been fully reviewed.
The latest guidance that it is not anticipating any 'material Covid related inventory write-off' is good news. Also good to see furlough monies being paid back / not prospectively being taken and it is 'on track to emerge as a stronger and more resilient business', including 'substantial' full year 2020 profit growth and 'positive free cash flow generation' in this financial year. This all sounds great, but let us not forget that profitability has been skinny and there has been a reason why the company raised money a few months back... Gross margins also fell. Nevertheless, it is growing as the four months ending 30th June saw group sales up 9% (and 10 month period +16%). Geographically, the EU and RoW drove this whilst the UK and US were mildly negative due to mix/lockdown effects including less 'occasions' spend from key groups such as the 20-somethings, which cannot be offset fully by activewear and other pandemic-friendly areas.
ASOS is doing okay but you have to be a real believer that it is going to be a 'global leader in retail' - as its presentation states - on an either side of x50 earnings multiple and negligible free cash flow yield. These metrics should improve over the 2021-3 period but even bouncing back to previous 20%+ sales growth level, this is a very tough one to buy unless you think somebody is going to buy rather than build an online clothing operation. Surely even Primark are not that desperate?! I note the resistance at a c. 35 quid share price late last year and earlier this year. Channel your inner Zak Mir and heed the warning of the chart. If you have a few of these, then cash in your post-money raising gains and exit into the night. I hear there are some cheap Leicester hotel deals going to help recycle your profits...
Filed under: Burberry, ASOS, Deltic Energy, Reabold, Xaar, Simec Atlantis, LoopUp, BSF Enterprise, GVC
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