The plot has thickened for Burberry (LON: BRBY) as its stock continued its downward trend. It crashed by over 10% on Thursday after the luxury group published weak financial results and lowered its guidance. The shares retreated to a low of 1,558p, the lowest level since July 2022.
Slow revenue growthLuxury brand companies are going through a rough patch as wealthy people slash their spending. As I wrote recently, companies like LVMH, Kering, and Richemont have gone through a slowdown that has hurt their stocks. Only Hermes has outperformed the market recently.
Burberry’s sales remained under pressure in the 26 weeks to September 30th. Its total revenue rose by 4% to £1.3 billion while its operating profit fell by 6% to £223 million. Additional reports showed that it moved from a free cash flow of over £88 million in 2022 to an outflow of £15 million.
Most importantly, the company warned that its business would remain under pressure if the weak demand environment continues. It then lowered its operating profit guidance will be between £552 million and £668 million. The CEO said:
“While the macroeconomic environment has become more challenging recently, we are confident in our strategy to realise our potential as the modern British luxury brand, and we remain committed to achieving our medium and long-term targets.”
These results are a reflection that the industry is not doing well as interest rates remains at an elevated level. While many wealthy people are immune to these shocks, most of them have opted to reduce their spending.
Still, there are some positive signs for the company. First, there are hopes that central banks will start cutting interest rates in 2024. Economists at UBS expect that the Fed will deliver several rate cuts in 2024. With UK inflation falling, there is also a likelihood that the BoE will also cut rates.
Second, there are signs that the Chinese economy is bottoming. It expanded by 4.9% in Q3 while data published on Wednesday showed that China’s retail sales and industrial production rose in October.
Further, and this is purely speculatively, there is a likelihood that the company will be acquired. The company has a market cap of over £5.71 billion and is the biggest player in British luxury. Analysts believe that the sector is ripe for consolidation. In August, America’s Tapestry announced its acquisition of Capri in a $8.5 billion deal.
Burberry share price forecast
Turning to the weekly chart, we see that the BRBY stock price has been in a freefall in the past few months, as I warned in April. The shares have moved to the 61.8% Fibonacci Retracement level. It has plunged by more than 38% from the highest level this year.
The stock’s 50-week and 100-week moving averages are about to make a bearish crossover. The Stochastic Oscillator has moved to the oversold level. Therefore, I suspect that the stock will have some short-term volatility as concerns in the sector continues. In the long term, however, the stock will likely bounce back.
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