The Burberry (LSE:BRBY) share price is up about 45% over the past year. On the other hand, the FTSE 100’s performance is only around 12% in the same period. Meanwhile, the much broader FTSE 250 index has increased by over 29% over the past year. Needless to say, the Burberry share price has outperformed both indexes in the last 12 months.
But what’s behind this growth? And should I consider adding it to my portfolio?
A bit of background
Burberry has a 165 years history of producing quality luxury fashion apparel for its customers. The company makes luxury clothing, accessories, leather goods, fragrance and beauty products. It proclaims to use the finest craftsmanship and design with cutting-edge technology that has boosted its brand into gaining significant pricing power. The Burberry share price is currently trading around 2,100p with a market capitalisation of £8.52 billion.
Burberry’s financial performance over the past year
Burberry reported revenues of £2.3bn in its latest annual report. That’s actually down by 10% compared to a year ago in constant currency terms. However, its operating profit came in at £521 million. That’s a staggering 176% increase! But adjusting for the expected impact of Covid-19, operating profit was actually cloer to £396m which is down 8%.
Looking at the health of the balance sheet, as of the end of its latest financial year, the company had £1.26bn Cash on Hand compared to £929 million a year prior. Meanwhile, net debt was drastically reduced from £538m to £101m.
Considering the devastating effect of the pandemic, I personally think this performance is quite impressive. So, seeing the Burberry share price on the rise seems pretty understandable to me.
What’s next for the Burberry share price?
Burberry released robust results for the first quarter of its 2022 financial year, with sales up by 90% already. Marco Gobbetti, Burberry’s Chief Executive, said, “We saw strong growth across our strategic categories, in particular leather goods and outerwear, and exited markdowns in digital and mainline stores”.
Given the reported results, I think he’s not exaggerating. And consequently, I feel that the Burberry share pice has plenty more room to grow moving forward. But it’s far from a risk-free investment.
The risks that lie ahead
Burberry’s Chief Executive is set to step down at the end of 2021. Gobetti, who became CEO in 2017, has, in my opinion, re-energised the company and put it on a path of growth. During Gobbetti’s leadership, the Burberry share price rose by 59%. And for a high-end fashion business, that’s not bad at all. Therefore his departure may see this period of growth come to an end if his successor cannot meet performance expectations.
Beyond this looming risk, Burberry’s fashion luxury business is a very competitive one. Its main competitors are Christian Dior, LVMH, and Hermes, all of which are targetting the same niche pool of customers. Should these rival brands manage to stay ahead of Burberry regarding rapidly shifting consumer tastes, the business may begin to lose market share.
Summing up
Burberry appears to be in a strong financial position, and the rising share price has reflected this. At least, that’s what I think. And so, despite the risks, I am considering adding this business to my portfolio.
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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.
