Burberry Stock Price Down 8% – Good Time to Buy BRBY Stock?

Burberry stock is down 8% this morning after the Board of Directors announced the resignation of the company’s 62-year old Chief Executive Marco Gobbetti as the business performance has been quite positive during his four years at the helm.

According to a press release published by the firm this morning, Gobbetti will leave Burberry by the end of this year while he will become the top leader of the Italian luxury goods retailer Ferragamo.

The former head of the British high-fashion retailer informed that the decision would enable him to return to Italy to be closer to his family.

“With Burberry re-energised and firmly set on a path to strong growth, I feel that now is the right time for me to step down”, said Gobbetti in the statement released this morning.

Burberry’s Chairman of the Board, Gerry Murphy, said the company was “naturally disappointed” by the executive’s departure. However, he stated that he “fully respect his desire to return to Italy after nearly 20 years abroad”.

Meanwhile, Murphy emphasized that the company’s strategy and outlook remain “unchanged”.

Could this downtick be providing an opportunity to buy the stock of one of the UK’s top high fashion brands at a bargain? In the following article, I take a closer look at Burberry’s fundamentals to see if that could be the case.

Burberry BRBY stock – fundamental analysis

Burberry is a UK-based manufacturer and retailer of top-fashion goods. The company currently employs over 9,000 people around the world for its operations and it was considered the 20^th most valuable fashion brand in the world with an estimated brand value of $7.1 billion according to the Fashion United Index.

Last year, the company saw its sales plummet nearly 11% to £2.34 billion as the pandemic forced the firm to shut down its physical stores. Meanwhile, despite the market’s satisfaction with Gobbetti’s strategic approach to building brand value, sales had been progressively declining since the executive took over as they moved from £2.77 billion in 2017 to £2.63 by the end of the firm’s 2020 fiscal year – before the pandemic stroked.

However, Gobbetti managed to ramp up the company’s profit margins last year as they ended the period at the highest level since 2017 at 69.5%. Meanwhile, the company reported its best operating margin since the Italian executive took over at 16.9% while after-tax profits surged to £375.7 million – the highest bottom-line result reported by the company in the past 10 years at least.

However, Gobbetti managed to ramp up the company’s profit before taxes during that period as they moved from £394.8 million to £490.2 million last year.

The company’s total long-term debt stood at £1.2 billion by the end of last year, which results in a net debt of zero as the firm displayed cash reserves of £1.26 billion. Meanwhile, Burberry’s free cash flows have ranged between £400 and £600 million in the past 5 years, which results in a price-to-cash-flow ratio of between 13 to 19 based on the firm’s current £7.84 billion market cap excluding cash.

Multiple sources including Statista, Interbrand, and WTVOX estimate that the brand value of Burberry could stand between £4 and £6 billion, making up for almost two to three quarters of the stock’s total market capitalization ex. cash.

Today’s downtick indicates that markets are particularly worried about the company’s ability to keep growing its bottom-line profitability after Gobbetti is out of the picture. However, Burberry’s robust financial health, conservative valuation, and significant brand value make it an interesting value stock that also offers a decent dividend yield of 1.9%.

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Burberry BRBY stock – technical analysis

Today’s price action seen by BRBY stock has resulted in a break below a long-dated trend line that emerged from BRBY’s November lows. So far this year, excluding today’s downtick, BRBY had delivered a 25.7% return to investors after shedding 19% of its value during 2020.

For now, the price seems to have found a floor at the 2020p level but more downside momentum could come as the stock was trading near a multi-year resistance of 2,345p. The uncertainty about the firm’s future now that Gobbetti is out of the picture could be a negative catalyst that puts pressure on the short-term performance of the stock, at least until the market has more clarity about what might come next.

Although the Board has announced that there will be no changes to the strategic approach taken by Gobbetti, it remains to be seen if that will be the case once a substitute is appointed.

That said, Burberry’s conservative valuation could open up opportunities for investors to buy the company at a bargain if the share price continues to drop in the following days or weeks.

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