Its been a tough few monthsfor fashion retailers, as the mild weather hit sales of winter woollies and coats, but couldspring herald an exciting new season?
Luxury Gap
Luxury British fashion house Burberry Group (LSE: BRBY) was an exciting play targetingthe brand-hungry Chinese consumer but is that trend played out fornow? It has certainly looked that way. A crackdown on corruption and gift-giving has beenpartly to blame, as has slidingconsumer confidence as China flirtswith a hard landing. Burberrys share price is down a distinctly uncool 35% over the past year, but all is not lost.
Itsthird-quarter trading update revealed a welcomereturn to growth in mainland China, if overshadowed bytroublesin Hong Kong (where sales fell 20%) and Macau. Revenues are rising again, just. They were up 1% to 603m in Q3 against a4% decline in Q2, helpedby strong performance in Germany, Italy, Spain and Japan. Its digital drive continues to pay offand mobile now drives the majority of traffic to Burberry.com.
The future looks sticky, however, with the company warning of an uncertain outlook for luxury demand in 2017 and underlying cost pressures. But Burberry boasts a strong balance sheet and robust 20% operating margins. With its valuation dipping below 15 times earnings, now could be a good time to buy, even though China still casts a shadow.
Half Marks
Its a long time since Marks & Spencer Group (LSE: MKS) was a fashion leader. Its Christmas trading statement told the same old story of a booming foods business and ailing sales of general merchandise (GM), mostly clothing. Like-for-like GM sales fell 5.8% and it was easy enough for management to blame that on the weather, but dont be fooled.
Yes, M&S kept its cool as rivals were panicked into a price-cutting frenzy, and thishelped itpost a significant rise in gross margins. Yes, M&S.com is performing strongly, with sales up 20.9% driven by strong customer traffic. Yes, the food is fab. But I lost faith in Marks fashion sense years ago and it has done nothing to prove me wrong: last time I visited its Covent Garden store the food hall was bleeding edge 21st-century while the clothing department layout was lost in the 1970s. Are fashion customers being served? Absolutely not.
NEXT step
If you bought NEXT (LSE: NXT) five years ago youll be feeling pretty goodtoday as the share price is up 235%. But it has slippedlately, plunging nearly 15% in the past six months, andmild weather was only partly to blame. NEXT went into winter with reduced stock availability, due tooperational difficulties in its Directory division. Whilefrustrating, that soundslike a temporary problem rather than something more serious. But I was concerned by comments that rivals are catching up with its popular NEXT Directory credit book.
With operating margins of 20.3%, itstill has a firm grip on its business. Double-digit earnings per share growth is slowing to mid-single digits, so maybe the glory days are over. At 16 times earnings, youre paying a luxury valuation and getting a cut-price 2.2% yield. NEXTsstrong cash flow and colder January weather may help the next set of figures, and it certainlypromises more fashion fun than BRBYor MKS. But this isa tough sector right now.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
