Why Burberry Has Plunged 17%

Burberry (LSE: BRBY.L  ) plunged 17% to 1,139 pence in early London trade this morning after warning that current-year profits may come in around the lower end of City forecasts.

The luxury fashion group said retail sales growth had been 6% in the 10 weeks to Sept. 8, 2012. The FTSE 100 member also said the turnover advance had been due entirely to additional store space, as like-for-like sales were unchanged year on year.

Indeed, Burberry admitted like-for-like sales had seen a "deceleration in recent weeks," and the company now expects adjusted profits before tax for the 12 months to March 31, 2013 to be near the lower end of market expectations.

Angela Ahrendts, Burberry's chief executive, said:

As we stated in July, the external environment is becoming more challenging. In this context, second quarter retail sales growth has slowed against historically high comparatives. Given this background, we are tightly managing discretionary costs and taking appropriate actions to protect short term profitability, while continuing to execute on our proven five key strategies.

Today's statement from Burberry contrasts the group's first-quarter update from July, which revealed total revenue up 11%, as well as May's annual results, which reported total sales up 24%. Burberry's retail stores represent about two-thirds of group sales, with the balance produced by licensing and wholesale activities.

Prior to today, pre-tax profit forecasts for Burberry ranged between 405 million pounds and 450 million pounds, and earnings estimates for the current year are now likely to drop from about 71 pence to 67 pence per share.

That projection could put the shares on a possible near-term P/E of 17 -- which might tempt some investors, given that revised guidance implies profits should still improve 10% during the current year. Furthermore, Burberry's latest balance sheet showed net cash of 338 million pounds, which is equivalent to about 75 pence per share, or 6% of the current 5.2 billion pound market cap.

Burberry has also recovered from previous setbacks. During fiscal 2009, the group reported profits falling from 200 million pounds to 175 million pounds, and the shares collapsed from 566 pence to 160 pence -- but then went on to expand tenfold within three years as the business recovered strongly. Such potential returns suggest it may pay to keep an eye on Burberry.

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Maynard does not own any share mentioned in this article. The Motley Fool has recommended shares in Burberry. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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