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Burberry transformation in full swing

Daniel Lane

Daniel Lane - Fidelity Personal Investing

Luxury fashion brand Burberry this morning reported a 7% rise in pre-tax profits as the brand updated the market on its multi-year turnaround plans.

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Stores sales were up 2% overall, with the firm raising its dividend by 3% and announcing a £150m share buyback programme in 2020.

The figures cap the first of two pivotal years for the company, as designer Riccardo Tisci looks to establish a modern identity for the mac-producer while bosses bring down costs and slim down its real estate footprint.

Tisci’s monogram collection launches next week, drawing heavy inspiration from Thomas Burberry’s legacy and bringing it into 2019 and beyond. The evolution reflects a company building on its heritage but fully embracing the modern world. With references to social media growth, influencer-based marketing, and streetwear-inspired product launches in today’s update there’s an important message for fashion fans and shareholders alike - longevity requires change.

And while the market might pounce on blips in performance while the new strategy takes shape, long-term investors in the company will look to the opportunity a re-energised brand presents.

A move into the upper echelons of haute couture means a conscious “rationalisation of non-strategic retail stores in secondary locations by the end of FY 2020” (that’s store closures to you and me) and expected shaky retail sales in the short-term as a result of the loss of 38 locations. However, the real proof will be in the company’s ability to “accelerate and grow” from a new digital-first platform and more exclusive product set.

The right time for a buyback?

Share buybacks really do split investors but if Burberry’s future is as bright as they think it will be, CEO Marco Gobbetti could have the right idea here.

Buybacks come into the equation when firms with healthy balance sheets start to think about what to do with excess cash. There are alternatives - namely returning cash to shareholders via dividends, or reinvesting it into the company’s operations with a view to generating a higher rate of profit.

However, buybacks can make the most sense when the company believes its own shares are trading below their intrinsic value, which the market should realise in due course. The problem with this is that normally when companies have a pile of spare cash it’s because business has been booming, with the shares often overvalued.

Pragmatic as ever, star manager Nick Train expressed his concerns over Diageo possibly having the right idea but the wrong timing in their own buyback plans, “There’s no point in generating above average cash returns on capital if the excess cash is then misallocated. We do not say this is the case

with Diageo, but even the company admits that some of its investments of the last few years could have been better timed.”

Long-term investors recognise the strategy of buying the dips when the corporate strategy looks solid and, for many, there’s no higher demonstration of confidence than a company doing the same in its own shares. Burberry shares are currently at the same level as they were in February 2015, and while they’ve had their ups and downs since then management clearly thinks there is future value left on the table.

In the end, decisions like these are about allocating cash flows in a disciplined way that creates value for shareholders. Company bosses can be criticised for making big acquisitions that seem like vanity projects, or buying back stock when it’s high but the question investors must always ask is - what is the best way to create further value for the company and is management doing it?

Nick Train, who also holds Burberry in the LF Lindsell Train UK Equity Fund, points to this monitoring of company bosses as a key, if less glamorous, element in active fund management: "Sometimes we are asked what it is we do all day – given we are not trading in and out of our holdings. One answer is that we are watching very closely the capital allocation decisions taken by the boards of the companies we hold – knowing that cumulatively and over time it is the calibre of those decisions that will determine the long term success, or otherwise, of our own investment decisions."

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