Chauvet impressed with luxury brand’s expansion and prospects for outperformance

by John Marshall

Following the publication of the 2007/8 results Thomas Chauvet of Citigroup raised his target price for Burberry from 550p to 630p – some 26% above the current price. He believes that the company is ‘well placed to outperform the broader luxury market in 2008.’

Anne Ahrendts, the chief executive, has a detailed strategy to boost this iconic brand.

First of all she wants to leverage the franchise both by refreshing core categories but growing new markets such as childrenswear and licensing.

Secondly, as non-apparel products such as premium handbags account for 32% of sales, the aim is to increase their contribution significantly and possible enter the footwear market.

Retail growth will be accelerated by investing in additional space which will grow by 13% this year. There will be a significant investment in both the US and emerging markets where the group is under-represented.

Finally efficiency will be improved through supply chain improvements, better quality and operational improvements in distribution.

The company has year-end debt of £64 million. It would be happy to increase this to £100 million which provides headroom for bolt-on acquisitions and share buybacks.

The broker is forecasting earnings of 33.8p rising to 40.1p next year placing the shares on a PE of 14.7 falling to 12.4.

The writer holds shares in this company