Falling demand leaves Burberry under pressure

Burberry will announce its first-half numbers on 12 November, and the waning Chinese demand is hurting the share price.

A Burberry flag
Source: Bloomberg

Burberry is suffering from both adverse currency movements and falling Chinese demand, and the selloff is being accelerated as the problems have come at once.

Unfavourable foreign exchange movements forced the fashion house to lower its profit forecast for this year as a strong US dollar and Swiss Franc, along with a weak euro, hit the company. The outlook for those currencies suggests that further foreign exchange headwinds will be in Burberry’s future.

China accounts for between 30-40% of the company’s international revenue, and the economic slowdown in the second-largest economy in the world is already impacting its sales. Like-for-like sales in the first quarter dropped by 4%, compared with a 6% increase in the previous three-month period.

In 2012 Burberry warned about falling Chinese sales after Beijing revealed a plan to crack down on corruption, but this slowdown seems like it will be more prolonged. Burberry’s sales in continental Europe, Africa and The Americas are going strong, but the overdependence on China will still be felt in the near term.

When Burberry announces its first-half figures, traders are expecting revenue of £1.16 billion and adjusted net income of £100 million, and that compares with the second-half revenue and adjusted net income from last year of £1.4 billion and £237 million respectively. The firm will report its full-year numbers in May 2016, and traders are expecting revenue of £2.57 billion and adjusted net income of £326 million. These forecasts represent a small rise in revenue and a 7.1% fall in adjusted net income. 

Investment banks are bullish on Burberry, and out of the 27 ratings, ten are buys, 15 are holds and two are sells. The average target price is £15.29, which is 12% above the current price. Equity analysts are also bullish on SuperGroup, and out of the ten recommendations, eight are buys and two are holds. The average target price is £16.44, which is fractionally higher than the current price.

Burberry’s share price has been falling since February and the trend looks set to continue. A move below £13.08 will bring the support at £12.35 into sight, and a move through it will make the £11.30 region the target; the £10 mark is a major level of support. We could see a continuation of the short-term rally but £14 will be a stumbling block, and if it is exceeded £14.65 will act as resistance. 

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