Burberry has shown sizable valuations can lead to sizable disappointment

18th September 2012

The announcement, which led to Burberry's share price falling by a fifth, revealed the company's full-year profits would be at the lower end of market expectations due to weaker than forecast sales. To be clear, compared to many other businesses at the moment Burberry's performance is still pretty strong – indeed, the profit warning was made on the basis of a quarter that actually saw Burberry deliver 6% like-for-like sales growth, which is hardly a disaster.

The market, however, had much higher expectations and that is what, to our minds, explains the large fall in the company's share price. When a business trades on the sort of elevated valuations Burberry and many other luxury goods stocks have done recently, even a modest disappointment – and, frankly, 6% growth is a pretty modest disappointment – can lead to a lot of good feeling evaporating very quickly.

High price-earnings (PE) multiples leave precious little room to absorb any kind of upset and, as a result, there is the potential for a big move in the share price when some of expectation, hope and optimism surrounding a company dissipates. What is more, this does not have to stem from any bad news – it just has to be less good than investors were expecting.

This is what looks to have happened with Burberry.

Continue reading….


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