Burberry's Performance Muddied by Markdown Curtailment; Shares Present Relative Value

We are not planning to materially adjust our fair value estimate for narrow-moat Burberry after the company reported a revenue and profit rebound in the first half of fiscal 2022. In the second quarter, the pace of the sales rebound decelerated; on a comparable basis, sales were flat with 2019 versus 1% growth in the first quarter, with comparable full-price sales growing 10% (up 26% in the first quarter). We deem this performance as decent, as it compares with 10% comparable quarterly growth versus 2019 for Moncler and Kering and 38% for LVMH’s fashion and leather division. Burberry expects the curtailment of markdowns and outlet channels to be finalized by the end of the year, which should lead to overall sales trend acceleration, given solid full-price growth trends. We are comfortable with our mid- to high-single-digit revenue growth projections for the company in the years to come, accompanied with operating margin expansion. In a largely overvalued luxury sector, Burberry shares present relative value, in our view, trading at around an 8% discount to our fair value estimate.