Goldman downgrades Burberry on demanding valuation
Burberry was under the cosh on Wednesday as Goldman Sachs cut its stance on the stock to ‘sell’ from ‘neutral’ and reduced the price target to 1,855p from 2,148p, pointing to a demanding valuation.
GS said it likes the long-term equity story at Burberry but expects that activity to reinvigorate sales momentum will encourage higher incremental investment near term.
The bank cut its 2020/21 earnings per share estimates by 11%/18% and said that with Burberry trading on a CY20E price-to-earnings of 24x and EV/EBIT of 17.2x - versus peers at 22x and 15x - the valuation looks demanding.
Goldman said it continues to forecast an improvement in retail sales growth (FY19 +1%, FY20 +5%), but that peer analysis shows that periods of brand acceleration typically attract higher spend.
"With new product now entering stores, we see this as the time for Burberry to focus on capturing share in a competitive market.
"We now look for 7% growth in operating costs (ex-licensing) in FY20-21 (was +5%), driven by higher discretionary spend (marketing, sales), which we expect to accelerate in 2H20."
Goldman’s adjusted EBIT estimate for 2019 remains broadly unchanged at £435.5m, but it now assumes a modest drop of around 2% in 2020 to £425m, with its assumption of higher investment costs to support improved LFL momentum.
At 1100 GMT, the shares were down 2.9% to 1,897.50p.