Burberry: This Season's Must-Have Stock

LONDON -- Sometimes, you just gotta have it. That's how I feel about in-form fashion retailer Burberry  (LSE: BRBY  ) . I'm not talking about its scarves and handbags, its trench coats and iconic checks. I want it as an accessory for my portfolio. Burberry looks like the summer's must-have fashion stock.

Burberry has been the height of investment style for a number of seasons. Its share price is up a swanky 140% over the past three years, against 33% for the FTSE 100 as a whole. It did briefly fall out of fashion last year, but has shrugged off fears over a Chinese hard landing to rebound 24% over the past six months. Better still, Burberry has just posted a funky set of preliminary full-year results, with record revenue and growth. Group revenue rose 8% to 2 billion pounds, while adjusted profit before tax was up 14% to 428 million pounds. Loyal investors will have applauded management's 16% full-year dividend hike to 29 pence per share.

Stocks and frocks
One item caused a bit of a stink. Burberry incurred an 83 million-pound charge following the termination of its fragrance and beauty license with Interparfums. That hit reported profit before tax, which fell 4% to 351 million pounds. Investors have also wrinkled their noses at the smell of fear emanating from French-based fashion rivals LVMH and PPR, which have both complained of sluggish growth in China. Yet Burberry is doing fine in Asia-Pacific, with revenue up 14% to to 745 million pounds, compared to just 1.4% in Europe to 560 million pounds, and 6.6% in the Americas to 463 million pounds. China's still gotta have it. Burberry is also a wow on social media. Its 15 million fans make it the most followed luxury brand on Facebook.

Some investors don't do fashion. They would rather gaze at a company balance sheet than a catwalk. They don't want to submit their portfolio to swings and fads. But they're wrong. Fashion is forever. Whenever people have cash to spare (and many still do, especially in Asia), they will want to show it off. Burberry has been the beneficiary.

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Like those French fashionistas, I am a little worried about a China slowdown. Brands can fall out of favor, austerity chic could still win the day. My biggest concern is that the valuation is looking pricey at 21 times earnings, while the forecast yield is a plodding 2.2% (although 2.4 times cover suggests scope for further double-digit hikes). Happily, earnings per share (EPS) growth of 9% to March 31, 2014 and 13% the following year look pretty cool to me. Credit Suisse has just upped its target price from 15.50 pounds to 16 pounds and maintained its outperform rating. Right now, you can buy Burberry for 15 pounds. If that's a little out of your price range, current market turbulence suggests you could pick it up cheaper in a summer sale.

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