Burberry’s weakness could entice luxury shopper

Bling opening. Burberry’s weakness could turn into an investor opportunity. Shares in the maker of pricey trench coats and check scarves are down 45% from a year ago as CEO Jonathan Akeroyd struggles to turn the 4.5 billion pound brand around quickly in a tough luxury market. Its depressed valuation is getting close to the level that may attract a potential suitor.

Burberry’s second profit warning in three months suggests Akeroyd’s promise to lift annual revenue to 4 billion pounds in the medium term looks set to be pushed further into the future. The company said on its adjusted operating profit for the fiscal year ending in March would come in at between 410 million pounds and 460 million pounds. That’s a 25% fall in the worst-case scenario after already guiding investors’ expectations lower in 

Akeroyd, who took the helm in is betting designer Daniel Lee can reinvigorate the UK brand and make a mark in higher-margin leather goods. That’s not easy while inflation eats into consumers’ spending power. And Lee’s products are still a small proportion of Burberry’s current offering.

Buyers who trawl the luxury goods arena are keeping an eye on Burberry, an investor told Reuters Breakingviews. The company is one of the few listed bling names that is not family-owned. Still, its size and weakening growth would make it hard for a private equity house to make a decent return in the short term, Breakingviews calculations suggest.

Large industry players may find the situation more enticing. Gucci-owner Kering is an unlikely suitor as it is still digesting a string of recent acquisitions and it’s also busy restructuring its top brand. That leaves $363 billion behemoth LVMH as a potential buyer.

If the Christian Dior owner were to offer a 30% premium, Burberry’s price tag would rise to some 6.6 billion pounds including net debt of nearly 900 million pounds. If LVMH can squeeze an EBIT of 600 million pounds from Burberry in about three years, one year later than what the market expected before Friday’s profit warning, the French giant would still be able to make a return of 9% even assuming no cost savings. That’s not far from Burberry’s estimated cost of capital of 10%.

Moreover, Burberry is large enough to move the needle at LVMH’s bottom line. And owner Bernard Arnault has shown with Tiffany the French group can rapidly improve a brand’s fortunes. For hard-beaten Burberry investors, a deal could be a potential silver lining.