Burberry is about to be kicked out of the FTSE 100…

Shares in luxury fashion designer Narrow-Moat have suffered steep declines of late, losing 50% of their value so far in 2024 and 70% in the last 12 months.

Morningstar Key Values ​​for Burberry (BRBY)

• Morningstar estimated fair value: £13.30
• Morningstar rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High
• Discount to fair value: 48%
• Sector: Cyclical consumption

According to Jelena Sokolova, senior equity analyst at Morningstar, Burberry has been blocked by three main obstacles. So far he has not been able to overcome them.

“Firstly, high exposure to slower-growing apparel and relatively low revenue exposure to flagship outerwear products,” she says.

“A failed push into the avant-garde in fashion, with three creative director changes in the last 10 years, and a failed push into leather goods, (which is a) very competitive area, with established strong players where the Burberry brand is not strong enough.

“(Then there are) recent price increases coinciding with a slowdown in luxury purchases and particular weakness in the aspirational consumer.” The latter factor was partly driven by weaker than expected economic growth in China.

Sokolova still sees upside potential in Burberry shares and gives the company an estimated fair value of £13.30.

“Historically, luxury recessions have not lasted more than one or two years, and Burberry has a chance to reinvent itself through a renewed focus on key outerwear collections and more affordable ranges,” says Sokolova.

In July, Morningstar cut its fair value estimate for Narrow-Moat Burberry from £15.70, reflecting weaker expectations for this year as well as a slower recovery in long-term sales.

Burberry’s sales revenue fell 21% in the three months to 29 June. Sales in the Asia Pacific region also fell 23 percent, while sales in mainland China and the Americas fell 21 percent and 23 percent, respectively.

The disappointing results prompted the company to suspend its dividend.