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I'm looking for the best FTSE 100 Index Recovery stocks to buy for next year. And Burberry Group (LSE:BRBY) is near the top of my list after its recent share price collapse.
Should I buy it for my wallet? This is my opinion.
On the shelf
I follow Warren Buffett's advice of “Never invest in a business you can't understand“Very seriously. That's why I had never considered buying Burberry shares for my portfolio before.
Maybe it's because of my age or because I don't understand fashion. In any case, I don't know what makes their products better or worse than other luxury brands. I know they're famous for their raincoats and their signature checkered print, but that's about it.
However, the sharp fall in its share price this year has made me take notice. At 601p a share, Burberry's price has plummeted by 10%. two thirds Over the past 12 months.
As I say, I'm not the best person to ask for fashion advice, but I know what a company in trouble looks like. And this is where the red lights go off.
Burberry, which will lose its prestigious FTSE 100 listing next week, reported a 22% drop in sales in its latest financial statements covering the period from April to June.
It also faces huge costs in refurbishing its stores and has suspended its dividend to ease pressure on its balance sheet.
The problems are deep
Like other luxury brands, the firm is suffering as wealthy customers tighten their wallets in response to the uncertain economic environment. Even this previously robust segment of the retail market has suffered in the current climate.
Names included LVMH, Dry and Hugo Boss They have also reported disappointing sales, partly due to the weakening Chinese market. But Burberry's problems appear to run deeper than this.
The company appears to be going through an identity crisis. In the late 2010s it changed its strategy to focus on the ultra-high-end segment of the fashion market.
But he's already partially throwing in the towel on this idea. His focus now is on “Rebalance our product offering to include a broader offering of everyday luxury products and a more complete assortment in key categories.“, he said.
Burberry has had five different CEOs in just over ten years. It has also had several creative directors in that time, although that is not unexpected in a company like this. But I think the CEO situation shows a company without a clear direction and that is in a mess with its brand.
It's still expensive
I'm not ruling out Burberry, of course. Its latest chief executive, Joshua Schulman, has a solid track record at heavyweight brands such as Michael Kors, Jimmy Choo and Coach. He could be the man to turn the firm's fortunes around.
However, for me it is too much risk, especially at current prices.
Even after its share price fell this year, Burberry shares still command a high valuation. Its forward price-to-earnings (P/E) ratio of 28.1 times It is more than double the FTSE 100 index average.
Considering the mountain the firm has to climb, I don't think opening a position at these levels is a good idea. Such a rating could trigger another price drop if news coming out of the fashion house scares investors again.
I think there are much better recovery stocks I can buy right now.