Burberry (Baa2, NR) Background on co

6Y mandate out, FV to follow,

A hard name to like here after a rough FY24 with guidance for next 6 months remaining weak. April trading conditions were described as "challenging". It gave no numbers on the size of any recovery after that. Some of this is macro but compounded by brand issues (think Kering). Concerningly for credit, a lack of cash generation last year did not stop large buyback & dividends, dragging BS outside of the leverage target. Stock hasn't been supported on that either - it is at a 12y low. Small scale, single brand exposure, low FCF and high beta on China exposure are the other drawbacks.

£1=€1.18.

• Burberry is a £3b lux retailer known for its trench coats & scarves. Sales are 44% in APAC (bulk of it from China), 35% in EMEIA & 21% in Americas. Its above pre-covid level in magnitude but has struggled more recently for growth. FY24 (12-month ending March) saw comparable store cc sales fall -1% yoy which it attributed to a "slowdown in luxury demand globally". US has continued to be weak for it where it pointed to an acute slowdown in aspirational consumers (similar to Kering), Asia turned weak in 4Q last year.
• Margins are not trending positive either; gross down -170bps on comparable basis in FY24, operating -500bps. It tagged gross weakness mostly to new product launches driving designer and supplier costs.
• Guidance for FY25 was thin and a caused complaints/caution from equity analysts. Company added "in the context of a still uncertain external environment, we expect 1H to remain challenging". It did give numbers to 1H wholesale (to fall -25%) and capex of around £150m (down from £208m).
• Wholesale makes up ~£500m of sales currently and has been the weaker - a trend that's expected to continue. It said the "bulk" of the -25% 1H fall in the segment will be on a purposeful pullback (particularly in Europe).
• On Capex, this isn't PVH like in its strategy on turnaround - Burberry's strategy includes refurbishing stores which it says is 50% done and targets 100% by 2027. That is in the face of foot traffic weakness that was flagged in FY24. It's hard to see how protected it is from latter given no numbers on online sales co adding "we don't share our digital sales as a percentage of our business, that's not something we call out." On cost efficiencies; its mentioned but no targets outside of "offset the impact of inflation in 2H".
• FCF was £63m down from the £393m last year mostly on above operating profit fall and another ~£100m drag on working capital. Despite weakness it did £402m in buybacks and £233m in dividends.
• It carries £1.2b in lease liabilities, £300m in bonds (the 25s) and £366m in cash. It left net debt at £1.1b against adj. EBITDA of £797m or 1.4x levered and above its net 0.5-1x target. On latter its added "comfortable with current leverage position to maintain IG rating as we go through our creative transition" - indicative to us of a gradual shift away from the numeric target as long as IG ratings remain intact.
• In late May Moody's revised outlook down from Pos. to Stable citing the FY24 results & it's view that "continued soft demand in the luxury apparel market will likely prevent any recovery in Burberry's earnings in its fiscal 2025." It holds IG ratings on its level of gross debt to EBTIDA.

A recent article highlighting the brand issues; "How British fashion icon Burberry lost its way"