Burberry’s Chinese engine revs up

It looks as if Chinese growth worries are overdone, as fashion house Burberry reports a surge in sales for the first quarter.

Mining stocks might be worried about China and a slowdown in economic growth in the world’s second-largest economy, but it seems the appetite for expensive macs and accessories is still strong in east Asia.

Sales in the firm’s first quarter were £339 million, up 21% from a year ago, while like-for-like sales were up 13%. Strong growth in east Asia allowed the firm to weather poorer performance in Europe, the Middle East and Africa. It is a remarkable turnaround for Burberry, which was forced to issue a profit warning last year on the back of a more difficult period in China. However, first-half profits are still expected to be below last year, a reflection of the less promising macro-economic outlook.

Burberry enjoys the benefit of healthy margins, with profit margins sitting at almost 13%. A 20% gain for the shares this year is an impressive return when you consider that the company has had to battle against high expectations that could easily have ended in disappointment. However, with the shares now sitting just below £15, they are only a short distance away from the May high of £15.50, suggesting only limited upside in the short-term.

Today’s sharp gap higher means the shares could be subject to some opportunistic shorting, but those with an eye on longer-term movements will be emboldened if we see the shares press back towards the 2013 high.

Burberry Group chart

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