International Financial Analysis of Burberry

Introduction

This report is meant to financially analyse Burberry PLC over the course of the past three years

in order to determine whether or not it is a good company to invest in. The global and British

economies will be analysed to comprehend the type of market Burberry is operating in. The

finances and retail industry will be assessed to see the possible non-monetary, external factors

involved in the profitability, efficiency, and liquidity of the company. Finally, a ratio analysis of

the entire Burberry PLC company will be performed in order to assess the profitability of the

investment.

Burberry PLC

The Burberry brand was founded by Thomas Burberry in 1856 but the first London store opened

its doors in in 1891. Burberry is known for being innovative, starting off with the invention of

gabardine – a cotton weatherproof fabric that gave Burberry’s its reputation. Today, the company

is still as innovative, Burberry is an industry leading investor in artificial technology to improve

the customer experience not only within their boutiques, but through the use of social media to

its full potential (Burberry PLC, 2017).

Earlier in 2017, Burberry’s Chief Executive Officer and Chief Creative Officer, Christopher

Bailey stepped down and Burberry hired “luxury retail veteran” Marco Gobetti in hopes of

steading Burberry’s shares (McClean, 2016).  During Mr. Gobetti’s first few months in charge,
he has set a plan in motion to gradually start saving £120m a year, increase revenues, and lodge

itself “firmly in luxury” by improving customer experiences (Vandevelde, 2017).

Economic Outlook

The economic outlook will contain a brief analysation of the global economy and the British

economy to determine stability and risk.

Global Economy

The global economy is expected to stabilize by the end of 2017, because global trade has risen

and so has the emerging markets. Not only will a stronger global economy be present in

developed nations, but it will also be present in developing nations. Although there are some

risks present, such as the “possibility of financial market disruptions,” there is more evidence of

a stable global economy (Global Outlook a Financial Recovery, 2017).

British Economy

The United Kingdom’s economy is the third largest in Europe and it is a leading financial centre.

The gross domestic product has increased an average of 1.5% over the past year and it increases

by 0.4% quarterly (Ons.gov.uk, 2017). This means that the gross domestic product has not been

sharply decreasing or increasing which is a sign of economic stability. The unemployment rate is

at a steady 4.9%, which compared to the American market the unemployment rate is at parity

and at a healthy point. Even though the British economy is one of the fastest growing economies,

Brexit has put London’s title as the European financial centre in jeopardy and there is a vast

amount of uncertainty surrounding the overall position of the British economy amongst and with
members of the single market (Cia.gov, 2017). Overall, the British economy is steady regardless

of the uncertainty of the future and consequences of Brexit.

Retail Industry Outlook

Burberry operates under the wide umbrella of the retail industry, but finds itself within the luxury

fashion market niche. The luxury fashion market in Britain is projected to be worth £54bn within

the next two years and the sector is valued at 2.2pc worth of the UK gross domestic product

(Armstrong, 2015).  In order for luxury fashion brands to succeed, companies are now targeting

generations Y and Z to keep in business in the long-term future. Generations Y and Z spurred the

85% growth in luxury sales in 2017 (Agnew and Rutter Pooley, 2017). Therefore, luxury fashion

brands need to market towards millennials and the younger generations to succeed in the

changing world.

Ratio Analysis

The analysation of Burberry’s financial statements through the use of ratios is essential in

determining the company’s profitability, liquidity, efficiency, and capital structure. Burberry’s

financial ratios will be compared to industry standards and to Jimmy Choo PLC’s in order to

fully comprehend whether Burberry’s finances are up to, above, or below industry standard.

Profitability Ratios

The profitability ratios will not only measure and demonstrates Burberry’s efficiency in

producing profits, but it will also shed a light towards the company’s efficiency in managing its

costs and investments.

Gross Profit Margin

From the year ending in March 2015 until the year ending in March 2017, the gross profit margin

ratio has remained within 0.50%. This signifies that Burberry’s profitability in manufacturing

and selling goods has stagnated over the past three years. A stagnant gross profit margin means

that, while the management of the cost of sales has not deteriorated, it has not improved either. It

can also indicate stability in the company’s prices and stability of overall costs. To further

support the previous statements, the retail industry median is 43.9% and Jimmy Choo PLC’s

gross profit margin is 64.01% (Benchmark Breakdown: Key Metrics On 25 Industries, 2017).

Burberry has a much higher ratio than the industry standard and a slightly better ratio than its

competitor. Therefore, even though the ratio has decreased by 0.21% over the past year,

Burberry is still more efficient in producing a profit above the cost of sales than expected which

can be due to the high prices that the luxury fashion market lends itself to and high demand.

Operating Profit Margin

The operating profit margin has been decreasing since March 2015 from 17.45% to 14.26% in

March 2017. The decreasing ratio indicates a decrease in Burberry’s profitability in its trading

operations and a decrease in the company’s control of fixed costs. This may be due to an increase

in overheads while operating profits slightly decrease as shown on page 127 and 123 of

Burberry’s Financial Statements of 16/17 and 15/16 respectably. Even though Burberry has a
decreasing operating profit margin it is still nearly three percentage points higher than its

competitor Jimmy Choo, whom has a ratio of 11.81%. 

Net Profit Margin

Burberry’s net profit margin has decreased from having a 13.52% net profit in 2015 to a 10.40%

net profit in 2017. This indicates that management has not been successfully creating profit,

which is due to increasing overheads as revenue has only increased according to the statement of

cash flows. However, compared with the industry standard, which stands at 3.6%, and Jimmy

Choo, which stands at 4.12%, Burberry is more successful at generating profits than the industry

norm and its competitor. 

Return on Assets (ROA)

The increase in the return of assets ratio demonstrates that the efficiency of which Burberry

management have handled and used their resources has been profitable. The ratio’s increase

could be due to profitable investments in total assets made by management.

Return on Equity (ROE)

Return on equity lowered nearly seven percentage points from 2015 to 2017. This indicates that

the capital invested by ordinary shareholders has been decreasing in profitability over the past
three years. After analysing the statement of cash flows for all three years, the return on equity

has decreased due to a slight increase in dividends and a decrease in investing activities. Even

though Burberry’s return on equity is decreasing, the ratio at which it stands still gives the

company a high advantage compared to the industry standard of 9%. Since Burberry is nearly

twice as efficient in the return of equity, the company can still afford it.