Hoping to do a series of write ups on the stonks i’m picking up in this bear market; here’s one to start. scroll to botttom for a tl;dr
In 1856, A British chap called Thomas Burberry founded his namesake company aged just 21. He hit big when, during WW1, the British military asked him to design and make 500k coats for them using Gabardine, the wonder-fabric he invented; Just like that, the Trench Coat was born.
Still from the film 1917; watch it and see if you can spot the burberry coat…!
When Burberry’s now-famous scarves debuted in 1967, the scottish tartan pattern they bore (dubbed ‘nova check’) went old-time viral, and became an enduring trademark. Having officially supplied the royal family by ‘royal warrant’ for 60+ years, Burberry stands today as Britain’s dominant luxury fashion house, with over 500 stores in 50 countries.
Cara Delavingne in an iconic Burberry Cashmere scarf; Celebrity endorsement is a key part of marketing and elevating brand value in fashion; Emma Watson, Matt Smith and Kate Moss have have all worked with Burberry.
The Power of Brand as a Moat
Burberry’s continued success rests almost entirely on their brand; strong brands act as a durable competitive advantage (moat),
Pricing power: By far the most valuable asset of a brand in my opinion. Burberry’s strong brand allows them to charge £150 for a polo shirt that costs £4 to make - simply by stamping their logo on it.
Barrier to entry: It would take years for a competitor to build a (luxury) brand, let alone one that can challenge Burberry’s heritage; Burberry is not a british luxury brand but the british luxury brand, i.e. they have ‘top-of-mind’ brand awareness.
Brand loyalty: This can reduce marketing costs, and drive repeat business. Not Burberry’s strong point right now, though.
Intellectual property: Okay, technically separate to brand, but same ballpark of intangible moats - IP lends to a legal shield that helps thwart competition/counterfeits. Burberry famously sued -and settled with- Target (American B&M) for trademark infringement in 2018.
Burberry’s brand positioning and brand word association map, a small peak into the study of brand equity
Today, Burberry’s brand value has been estimated to be ~$5bn; the 94th most valuable brand in the world on the famed interbrand list - ahead of Prada, but well behind Louis Vitton, Gucci and Hermes.
Battle scarves: brand fuck-ups
“It takes 20 years to build a brand and five minutes to ruin it” - Warren Buffett
20 years ago, nova check had spread through over-licensing (we’re talking Burberry dog collars and kilts!) and counterfeits to be donned by controversial soap stars and football hooligans, hurting that precious brand value. This was a path to doom, but Ex-ceo Angela Ahrendt is credited with recapturing brand prestige through IP protection and license buybacks, (also tripling sales in her 8 year stint. Burberry’s market cap lost ~£300m when she resigned. Burberry is today led by ex-Givenchy duo CEO Marco Gobetti and Creative exec Ricardo Tisci, who have led a bold rebrand to draw in younger consumers.
Whilst I see nothing but two top banter legends in this picture, I get that
this isn’t the look Burberry were going for.
To Invest or not to Invest: A Nova Checklist
What I love about Luxury is it’s anchored in conspicuous consumption (buying to show off), a human behavioural trait that, I believe, will endure.
Burberry is what they call a quality stock: High margins, high return on capital employed (the ‘efficiency’ at which profits are generated) and little debt or leverage (leverage can magnify losses, unpaid debt can kill a business). Interestingly, Burberry boasts traits of a growth (see growth drivers below) and income stock (modest 3.4% dividend, well covered but prone to occasional cuts)
China: Chinese consumers are Burberry’s growth engine - China is by far the fastest growing region in luxury. Additionally, being younger consumers, their wealth may well appreciate over time.
Online: Burberry’s main channels are retail and wholesale, with a 500-strong store network. Pivoting to an online/digital-first model would be transformative profit-wise; allowing them to reach a global audience in an extremely capital efficient manner…They have leveraged platforms such as farfetch, instagram and wechat to great effect.
The Chinese economy - With 40% of sales coming from China, anything that affects chinese consumers will affect burberry - should the emerging market’s wealth stagnate, it would heavily impact burberry. Before the coronavirus for example, it was political unrest in Hong Kong that had Burberry on the ropes.
Brand risk Brand risk is an umbrella term i made up; Whether it’s counterfeits or scandal, anything that damages Burberry’s brand can have disastrous effects. Being monobrand, Burberry is arguably higher risk unlike, say, the diversified LVMH - the ‘unilever’ of luxury fashion.
In 2018, Burberry got backlash for infamously burning £90m in overstock, ironically to protect their brand (discount selling would hurt brand equity in the long term). Whilst they recovered from the PR nightmare, as strong brands tend to, this is a classic case of brand damage.
The growing ‘pre-loved’ or resale market (e.g. Depop) is also a potential threat. A potential opportunity some argue: e.g. resale sellers may use proceeds to purchase further goods. The market is currently worth ~£20bn and has grown at a CAGR of 9% 2015-18
You do also have the bog standard -and very real- risks of competition (via Hermes, Gucci, LVMH, etc), foreign exchange, regulation and so on.
Footnote: Burberry rents their stores, and has growing rent obligations. The clever Prada, on the other hand, have bought London properties to insulate themselves against rising rents.
In the trenches: Coronavirus
In response to the coronavirus outbreak, Burberry closed 24 of 64 stores in mainland China, also adding further disruption is expected. A solvency deep-dive suggests that Burberry’s in good shape to weather any brief storm.The million pound question, ofcourse, being whether the turmoil will be a long or short term upset. Burberry’s price-to-earnings (or price-to-book if you want to take a more cyclical view) hasnt been this low since 2008… I encourage you to draw up your own numbers on Burberry’s fair value; a note of caution in that the ultimately volatile nature of Burberry’s revenue makes cash flow difficult to forecast. These are turbulent times.
picture taken well before the COVID-19 outbreak; that nova check facemask though <3
I’m still patching up this post but, as ever, please also feel free to offer feedback on my take, I am always looking to improve; Let’s discuss this stock! feel free to DM me and i’ll try to package my wall of notes and send them your way.
Too long; didn't read
Burberry is a 160 year luxury fashion company known for it’s Coats, scarves and signature check pattern. It’s brand is it’s most valuable asset, giving it pricing power and defensibility (through barrier to entry, IP, etc). It’'s main tailwinds are the the rise of China’s wealth and therefore luxury fashion demand, as well as online sales. It’s headwinds are the volatility of the chinese market, and anything that can hurt their brand (scandals, poor management, etc). Numerous risks are abound such as competition, the growing fashion resale market and currency risk. The stock offers a 2.4% dividend and growth potential, with the COVID-19 outbreak having sent the stock to a potentially attractive entry (or exit!) point.
Thankks for taking time out of your day to read this
I hold Burberry. No affiliation with freetrade (beyond shareholder). Opinions my own. Not investment or financial advice. Do your own research.
In good time
- Burberry made the ‘tielocken’, the precursor to the Trench Coat.
Sources to all photos to come where possible!