Todays results from Burberry (LSE: BRBY) highlight the challenging environment that it is currently facing. Indeed, the company has reported a decline in first half earnings of 12%, with pre-tax profit falling from 173.9 million in the first half of 2013 to 152.3 million in the first half of 2014. However, this fall is mainly due to currency headwinds which, when removed, mean that Burberrys adjusted pre-tax profit comes in 6% higher than last time around.
While encouraging, Burberrys adjusted first half earnings are slightly below analyst forecasts (by around 0.8%) and highlight that trading conditions remains challenging for the designer brand. Indeed, Burberrys adjusted revenue growth of 14% in the half year perhaps masks a wider situation where demand for luxury goods has eased somewhat, which is at least partly due to a slowing Asian economy. As such, Burberry expects slight downward pressure on margins to continue for the full year.
Brand Loyalty
Despite this, Burberry remains well placed to benefit from the future growth of emerging markets. For example, next year it is forecast to increase earnings by an impressive 8%, which is ahead of the wider markets expected growth rate. This shows that Burberrys brand remains highly resilient and is able to withstand periods of slower growth in its key markets as a result of the relatively high degree of customer loyalty that it enjoys.
Valuation
While Burberry continues to trade at a premium to the wider market, with its price to earnings (P/E) ratio being 19.6 versus 14.1 for the FTSE 100, it appears to offer excellent relative value for money when compared to a company such as ASOS (LSE: ASC). Indeed, ASOS continues to trade on a P/E ratio that is difficult to justify based on its current performance and near-term growth prospects. For example, earnings for the full year are expected to be down 2% on the prior year, with the company posting a fall in profitability in FY 2013 and 2014, too. As such, a P/E ratio of 59.2 seems overly generous for a company that is set to post three years of falling profitability.
Looking Ahead
While the economic environment is posing difficulties for Burberry in its key Asian markets and its top and bottom lines continue to be hit by currency headwinds, it offers investors long-term potential for growth. While ASOS also offers the same, I believe it lacks the strength of customer loyalty and resilience that Burberry has spent decades building up. Furthermore, a P/E ratio that is three times greater than Burberrys is hard to justify when earnings growth is distinctly lacking at ASOS.
As a result, and while the short term could remain volatile, Burberry appears to offer the more compelling investment case and, as such, could be a better buy than ASOS. Of course, Burberry isn’t the only company that could boost your investment returns in 2015 and beyond, which is why we’ve written a free and without obligation called 5 Shares You Can Retire On.
The 5 companies in question offer exciting growth prospects and trade at highly enticing valuations. As such, they could help you to retire early, pay off your mortgage, or simply increase your net worth.
Click here to find out all about them – it’s completely FREE and without obligation to do so.
Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. The Motley Fool UK owns shares of ASOS. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.