Burberry feels the pain of downgrades on currency concerns

Tuesday, 25 March 2014
ANALYSIS_ Burberry has had its stock downgraded by several analysts and brokers, who share concerns about the British luxury and fashion house to be hit by currency fluctuations. This estimated hit might whip off between 40 and 50million pounds of the retailer's 2015 earnings, or 8-10 percent negative impact on the company´s EBIT (earnings before interest and taxes).

On the wake of the news and in a matter of days, several analysts have downgraded their recommendations on the stock, reducing their price target for Burberry shares.

Burberry Group plc (LON:BRBY) was downgraded by equities research analysts at Bank of America to a "neutral" rating in a research note issued to investors on Friday. They currently have a 1,500 pence target price on the stock, down from their previous recommendation of 1,740 pence apiece. Bank of America's price objective indicates a potential upside of 8.93 percent from the stock's previous close, highlighted the analysis team.

Circa 65 percent of Burberry's costs are in sterling and euros. The recent strength of these currencies against the Japanese yen and US dollar is expected to take its toll on the company, hitting its 2015 revenues by 3.5 percent, Bank of America pointed out.

Ashley Wallace, analyst at Bank of America, explained in a note to investors his team´s decision to grow cautious about the stock, arguing that the recent adverse currency movements and the impact of launching the Japanese business can no longer be ignored.

The recent strength of the euro and the pound against the Japanese yen and US dollar will take its toll on the company, the broker said earlier this week. According to Wallace´s calculations, this currency impact will hit Burberry's 2015 revenues by 3.5 percent, although the impact it might have on EBIT (earnings before interest and tax) would be larger "given a mismatch between revenue currency and cost currency exposure".

"While we expect the underlying business to continue to outperform peers, our three-year EBIT CAGR [compound annual growth rate] is now only 4 percent given our view of the significant FX and Japan headwind," summed up Wallace.

Bank of America, Credit Suisse and HSBC downgrade Burberry´s shares

But Bank of America was not the only broker lowering its rating on the stock, with peers at HSBC cutting their price target on shares of Burberry Group plc from 1,850 to 1,820 pence, also on Frida. They now hold an "overweight" rating on the stock.

Separately, analysts at Credit Suisse reiterated a "neutral" rating on shares of Burberry Group plc in a research note on Thursday, March 20th, setting their target price at 1,600 pence.

As of March, 21, shares of Burberry Group plc have a 52-week low of 1,238 pence and a 52-week high of 1,687 pence, with the stock´s 50-day moving average coming in at 1,483.06 pence. At today´s valuation, Burberry has a market cap of 6.085 billion pounds.

Burberry´s shares have lost 13 percent of their value since the exit of Angela Ahrendts was made public.

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