Burberry Group PLC (LSE:BRBY, Financial) and Aston Martin Lagonda Global Holdings PLC (LSE:AML, Financial) are the only luxury brands listed on the Main Market in London.
From my observations, luxury brands should continue to benefit from two trends: quantitative easing and low interest rates. This environment helps the rich get richer in developed markets and allows for growing middle classes and wealth accumulation in emerging markets. The first trend enables old money to stay wealthy and supports the core of luxury demand, and the second trend creates new money and enables a growth runway in luxury demand.
Aston Martin Lagonda may be a value stock, but its financial strength is just too weak for me. An Altman Z-score of 0.3 and a Piotroski F-Score of 3 out of 9 make the risks too high for me, especially when Aston Martin Lagonda’s strategy appears to be in flux at best and confused at worst.
Burberry, on the other hand, is fairly priced according to GF Value is a quality stock from a financial standpoint as well. A Piotroski F-Score of 8 out of 9 and an Altman Z-Score of 4.4 means the stock is extremely healthy.
Burberry’s 160+ years of heritage gives is a moat that is impossible to replicate. Burberry’s design focus means its products are fashionable and of good quality. The sustainability agenda sweeping through the investment world also benefits Burberry. It has managed to raise finance through a sustainability bond last year, and it was an early company to sign up for the Science Based Target initiative, which targets reducing greenhouse gas emissions from operations.
Long-term focused guru fund manager Lindsell Train is Burberry’s largest shareholder, owning 5.4% of the company's shares outstanding. Burberry is the third largest holding of the Lindsell Train UK Equity Fund, taking up nearly 9% of the fund. Baillie Gifford (Trades, Portfolio) is also a large shareholder owning nearly 4.8% of Burberry.
There has also been various speculation over the years that LVMH Moet Hennessy (MIL:LVMH, Financial), one of Europe’s largest companies, might want to bring Burberry into its luxury stable. With Burberry CEO Marco Gobbetti moving to smaller rival Salvatore Ferragamo at the end of this year to be closer to his family in Italy, now might be a good time for private equity to make a smash and grab on Burberry too. Burberry’s shares are down 20% since Gobbetti’s announcement as the market rated him highly as a CEO. He had managed to implement and complete a turnaround strategy for Burberry.
This turnaround was the "Brand Positioning Transformation Programme," which focused on producing higher quality products and raising prices to enhance the brand positioning in the luxury fashion world. Riccardo Tisci, the innovative creative director and head designer, is also a huge asset to Burberry, and he has denied that he is leaving Burberry any time soon.
Burberry also had big public relations wins during the Covid-19 crisis in the UK. The company supported the government by switching production facilities to make and donate much-needed personal protective equipment. This relatively small financial cost showed the strength of Burberry’s logistical abilities at a time when much of the country was in lockdown and shutting down production facilities. Burberry’s financial strength meant it didn’t need to rely on government support, and it managed to move staff to a work from home operation when many other fashion companies simply decided to furlough employees and abandon seasonal launches.
Over the longer term, it is possible that Burberry could benefit from another “Roaring 20s." I’m not predicting another period just like the 1920's, but the criticism of fast-fashion’s throwaway culture and the push to buy better means I see a future were consumers focus on buying higher quality, longer lasting garments. With reduced travel options in the near and possible medium term, those with disposable income are likely to spend more on luxury items.
Burberry is also insulated from many of the trends facing the world through the so-called Fourth Industrial Revolution. You cannot automate creativity and you cannot replicate heritage. Luxury consumers are also far less sensitive to inflation, so Burberry has pricing power to protect margins in an inflationary environment.
Burberry’s financial management has also been good. After sensibly cutting the final dividend for 2020 and the interim dividend for 2021 to shore up the balance sheet in that uncertain time, Burberry’s final dividend for 2021 is 42.5 pence (58 cents) per share, showing significant growth from the 31.5 pence per share final dividend of 2019.
Fears over what a new chief executive might need or want to do are overdone in my opinion. The new CEO does not need to materially change the strategy, and the transition should be relatively clean. Gobbetti has done most of the hard work, and the brand repositioning is already running along nicely.
