Burberry a 'buy' for Berenberg as outlook improves for luxury goods

On the belief the uncomfortable ride for luxury goods companies is coming to an end, Burberry was initiated with a 'buy' rating by Berenberg due to its extra opportunities for cost cutting.

Although the absence of global inflation limits the impact of price and retail expansion opportunities are also limited, the sector's long-term growth drivers such as a growing global population, an increasing middle class and appetite for branded goods are still seen as intact, with some dynamics even improving.

"Most of the companies have adjusted their strategies to operate in a new environment, shifting their focus to retail productivity and cost control. Meanwhile, the end of the store-opening spree is leading to increased cash generation, which could mean rising shareholder returns," Berenberg said.

Burberry was highlighted due to its "significant cost-cutting opportunities, further supported by the recent management revamp", which saw chief executive Christopher Bailey step back to become creative director again, with Céline's Marco Gobbetti coming in as CEO in 2017.

Ahead of Burberry's second-quarter results, analysts Zuzanna Pusz and Mariana Horn believe the the trading update could mark a return to positive like-for-like sales supported by a favourable regional mix.

In the medium to long term, Pusz and Horn said Burberry had meaningful self-help potential in its stores given their previous lack of focus on improving sales densities.

They set a price target of 1,725p.