Upmarket fashion brand Burberry (BRBY) was one of the top performing FTSE 100 stocks on Wednesday after giving investors several reasons for optimism.

Yes, third quarter (Q3) sales dropped 9% on a like-for-like basis, worse than the 7% expected, but efforts to reel back markdowns helped shore up profits. There is also promising signs of demand recovery in Asia.

Burberry stock rallied more than 3% on Wednesday to £17.93.

The company said it currently had 15% of stores closed and 36% operating with reduced hours or restrictions and an uncertain trajectory given the spread of the more transmissible new variants of Covid-19.

Clearly the closure of physical stores as lockdown restrictions re-emerged towards the end of last year has affected sales, but direct-to-consumer online channels are more profitable, with the company saying that ‘our digital innovations supported more than 50% full-price growth in the channel.’

‘Online sales growth is also very impressive, particularly in mainland China’, said AJ Bell investment director Russ Mould.

TRAVEL TROUBLE

‘Burberry’s latest update shows how dependent it is on the tourist trade’, said Mould. But even when travel restrictions start to ease, the UK faces other issues, including the end of VAT refunds for non-EU tourists.

‘Burberry needs to find a way of making its UK stores and product pricing more attractive’, said Mould.

Still, efforts to reduce markdowns and the push to attract younger, richer customers through celebrity endorsements from the likes of Kendall Jenner and Marcus Rashford will help.

The footballer-turned-school dinners campaigner has received high praise for his outspoken crusade, and ‘his association with the brand will have placed Burberry in a favourable light with a lot of people’, believes the AJ Bell investment expert.

COULD BURBERRY GET TAKEN OVER?

Burberry admitted that near-term trading will remain susceptible to regional pandemic disruptions through to the end of the year in March, and quite likely beyond.

But Burberry remains a strong brand in the luxury space with room to appeal to a broader consumer base over the coming years, believes Neil Wilson of Markets.com.

‘The strategy to focus on up-market and full price sales seems to be paying off’, he said on Wednesday. The analyst also flagged emerging consolidation in the luxury space, where the world’s leading luxury brand owner LVMH recently completed its $15.8 billion (£11.5 billion) merger with global luxury jeweller Tiffany & Co.

‘Burberry may seem like a potential target with shares still trading at a discount to peers’, said Wilson.

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Issue Date: 20 Jan 2021