Burberry's Markdown Exits Continue to Weigh on Sales, but Underlying Performance Remains Solid

We are maintaining our fair value estimate for narrow-moat Burberry as the firm reported solid third fiscal quarter results with acceleration of full price sales and expected negative effect of markdown and outlet exits. Burberry also hiked full-year operating profit guidance to 35% in constant exchange rates with GBP 27 million currency headwind, an equivalent of GBP 500 million-GBP 515 million, which is already in line with our GBP 509 million expectation but higher than GBP 472 million consensus estimates, compiled by the company. We continue to see Burberry as one of the few slightly undervalued names in our luxury coverage (around 7% discount to our fair value estimate) as we believe its earnings growth should accelerate in the years to come as markdown exists are finalized in the next quarter, brand appeal seems to be solid (comparable full price sales of 18% in the first half versus 2019 levels and +26% in the third quarter), and better top-line growth bodes well for operating leverage. Although we expect some of the current industrywide tailwinds to dissipate (e.g. savings from foregone experiences) mid- to high-single-digit revenue growth in the next 3-5 years looks realistic.