By Burberry Group (LON: BRBY) share price has been in a strong freefall this year as concerns about its growth prospects continue. It has dropped in the last 14 consecutive months, making it one of the worst-performing names in London.
BRBY was trading at 597p, its lowest point since August 2010, and over 75% below its all-time high. This crash has brought its market cap to £2.14 billion, triggering its expulsion from the blue-chip FTSE 100 index.
Why Burberry is falling apart
Burberry stock is imploding for a few reasons. First, this sell-off is happening as some other top luxury goods companies drop. In France, shares of Kering, the parent company of Gucci, have dropped in the last three consecutive months and are hovering at their lowest level since April 2017. They are down by almost 70% from last year’s high.
LVMH, the biggest company in France, also tumbled to a low of 600 euros, its lowest point since October 2022 and 33% below its all-time high. In Switzerland, Richemont’s stock has fallen by 25% from its all-time high.
Hugo Boss is the other lagging luxury group brand as its stock has plunged by 43% from its all-time high.
These companies are struggling with the ongoing soft demand for luxury goods, especially in China, their biggest market.
There are signs that many people in China are being selective about their spending habits now that the housing and stock market are not doing well. In Hong Kong, the Hang Seng index remains 42% below the highest point in 2021.
The same is happening in Mainland China, where the China A50 has dropped by over 45% in the same period. These indices have been left behind by their Asian and American peers.
The housing market is also under pressure following the collapse of Evergrande, Country Garden, and other companies. While the government has pledged support, the promised $70 billion is not enough and is coming very late.
Therefore, many wealthy shoppers in China have started to focus on reducing their debts instead of overspending. This explains why Bloomberg has noted weak luxury mall traffic in a place like Hong Kong.
Burberry and other luxury brands have flagged the Chinese risk in their financial statements. In its last financial results, Kering noted that sales in Asia, except in Japan, continued to underperform.
Burberry financial results
Second, Burberry stock price has imploded because of the last financial results, which have showed that its business continued to deteriorate.
Its revenues in the third quarter stood at £458 million, down by 22% from the £589 million it made in the same period in 2023. Comparable store sales, one of the most important numbers in retail, came in at minus 21%.
Most of Burberry’s sales slowdown was in the Asia Pacific region where sales dropped by 23%. It was followed by the Americas and EMEIA regions where sales dropped by 23% and 16%, respectively.
Most importantly, Burberry lowered its forward guidance and suspend its dividend to preserve cash. It expects that its wholesale revenue will drop by about 30% this year. It was the third consecutive time that the company slashed its guidance.
Third, and most importantly, Burberry has had more CEO turnover than other luxury brand companies. Its current CEO, Joshua Schulman replaced Jonathan Akeroyd.
Akeroyd replaced Marco Gobbetti who was the head for four years between 2017 and 2021. Christopher Bailey was the CEO between 2014 and 2017 while Angela Ahrendts served between 2006 and 2014. A high turnover of CEOs is often seen as a red flag.
Additionally, there is a sense that Burberry’s positioning in the luxury goods industry has an issue. Unlike Hermes, which caters to the ultra-wealthy, Burberry’s customers tend to be more cost-conscious.
Most importantly, there are signs that Daniel Lee’s designs are not doing well. The company appointed Lee in 2022 and its performance has not improved.
Burberry share price analysis
Fundamentally, there is a likelihood that Burberry will stage a comeback or even get acquired, especially now that interest rates are falling. However, such a comeback will only happen if the company publishes an encouraging financial report.
On the weekly chart, we see that the BRBY share price has been in a strong freefall in the past few months. It has dropped from a high of 2,458p in April 2023 to below 600p. It formed a death cross pattern as the 50-week and 200-week moving averages crossed each other.
The MACD has remained below the neutral point while the Relative Strength Index (RSI) has moved below the oversold level. Therefore, the path of the least resistance is still downwards, with the next point to watch being at 500p.
The alternative scenario is where the stock rebounds and retests the key resistance point at 887p as interest rates start falling. Such a move would mean a 50% rebound from the current level.
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