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Bumpy day, but is Burberry PLC still a long-term winner?

It’s been a bumpy old day for investors in Burberry PLC (LON:BRBY).

A cursory glance at its prelims suggested the luxury clothing and accessories group was faring well in the aftermath of the pandemic.

It reinstated the dividend payment buoyed by a strong second-half bounce-back, while profits surprised on the upside.

The depressant appears to have been Burberry’s most recent sales performance versus rivals such as LVMH and Hermes, which are further along the road to recovery.

Niggling outlook

Also niggling the analysts was the outlook for costs as the company seeks to capitalise on growth opportunities.

This was not a good look for Burberry, which is benchmarked on its operating margins and is already lagging the likes of LVMH, Hermes and Michael Kors owner Capri Holdings by at least a couple of percentage points.  

This will explain why the shares were down almost 9% at one point and ended the day off 4.2% as the wider market recovered.

Analysts’ spreadsheets will have to be rebalanced and this, in turn, may result in some minor valuation tweaks.

Stick or twist?

But is this enough to ditch the shares? On a number of investment metrics, Burberry actually looks cheap – always remembering that luxury goods companies (like the merchandise they sell) command a premium rating price in the market.

A basic price-to-earnings calculation reveals the stock is trading at a modest discount to its peers, while the PEG (price-earnings-growth ratio) shows it to be fairly valued.  On the latter analysis, LVMH and Hermes look overbought.

Burberry’s free cash flow yield, meanwhile, is among the best in the industry, as is its dividend cover.

Real value for money?

While the pay-out itself is a little skinny to make Burberry and income play, it still provides a better than sector-average return too.

So, where does that leave us? If you think the margin issue is a one-year aberration, and you buy into the evolution of Burberry as it targets a younger audience, the stock should be a buy-and-hold opportunity for new investors.

If it is actual value for money you are in search of, it might be worth looking elsewhere.

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