Could Weaker Pound Make Burberry a 'Must Have' ?

Turnaround efforts at the luxury fashion brand have yet to funnel through, though UBS analysts see the devalued pound as an earnings-booster
By Kate Norton ,

Call it the ""Brexit' effect." Though investors may see little sign of it when Burberry (BURBY) unveils its first-quarter earnings on July 13, the pound's drop in value to the dollar to its lowest point in 31 years since the U.K. voted on June 23 to exit the European Union has prompted UBS to upgrade the luxury goods maker's full-year adjusted pretax profit estimate by a whopping 13% to £419 million ($542 million).

UBS also today upgraded Burberry's full-year forecasts for 2018 and 2019, and upped its share price target to 1,700 pence, from 1,550 pence.

Burberry's shares edged up up 0.6% to 1,167 pence in London trading. The shares, which closed at 1,105 on the day of the referendum, have risen 5.3%, since then.

The projections come as the company prepares to lift the veil on its first-quarter earnings next week. Analysts and investors aren't holding their breath, with the luxury goods maker's restructuring program still in its infancy and the wider economic outlook week.

Retail organic sales growth is likely to fall 4% in the quarter, analysts at UBS predict. Taking into account a positive foreign exchange benefit, UBS forecasts first-quarter retail sales of £409 million, virtually flat on the year.

Burberry, along with its peers, is struggling to cope in an industry that's expected to post a compound annual growth rate of just 2% to 3% in coming years. To address this -- and offset waning demand in China, its biggest market --the company announced an ambitious turnaround plan in May, designed to drive revenue growth, boost productivity and achieve at least £100 million in additional cost cuts by the 2019 fiscal year.

UBS noted that the company's share price "appears to show investors' skepticism on Burberry's execution."

There's also uncertainty about leadership, following the announcement chief operating officer John Smith will depart. As if questions about how effectively Christopher Bailey could handle the dual role of chief creative officer and chief executive weren't enough.

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