After falling out of the FTSE 100, what’s next for Burberry?

In a dramatic turn of events that would make even its trench coat-clad models raise an eyebrow, Burberry (LSE: BRBY) has found itself unceremoniously dropped from the FTSE 100 index.

This fashion faux pas comes after a year that’s been anything but stylish for the British luxury brand. With its share price plummeting nearly 70% over the past year, the firm’s market cap has shrunk faster than a cashmere sweater in a hot wash. But as savvy Fools, we know that one season’s fashion disaster could be next season’s must-have. So, let’s take a closer look.

From catwalk to catfight

Burberry’s fall from the FTSE 100 is more than just a symbolic blow. It caps off a year of challenges that has seen the brand struggle to maintain its luxury appeal in an increasingly competitive market. The company reported a troubling 22% decline in first-quarter retail revenue, with comparable store sales sinking 21%.

Burberry recently replaced CEO Jonathan Akeroyd with Joshua Schulman, a seasoned executive with a track record in high-end and aspirational luxury. Schulman’s mission? To transform Burberry into a brand with broader appeal.

This change at the top could be just what Burberry needs to rediscover its mojo. After all, in the fickle world of fashion, sometimes a fresh pair of eyes is what it takes.

But clearly, the luxury market is still a risky environment. Geographic concentration, particularly in China, exposes the company to regional economic fluctuations and geopolitical tensions. Currency risks, execution challenges under new management, and fierce competition all add to the mix.

The numbers

Burberry’s current price-to-earnings (P/E) ratio stands at a relatively modest 8.6 times. To some, this could suggest that the market has oversold the shares, potentially setting the stage for a rebound.

However, profit margins have taken a hit, dropping from 15.8% last year to 9.1%. On the brighter side, earnings are forecast to grow by 5.1% per year. Such numbers may not impress many potential investors, but it represents stable growth.

I think it’s important to note that the company’s struggles aren’t happening in isolation. The entire luxury sector has been facing difficulties. Companies in the sector returned an average market performance of -56.9% over the past year, but Burberry managed to do even worse at -68.7%.

Yet here’s where it gets interesting. Analysts seem to think the company has a decent future ahead. As the company begins life in the FTSE 250 index, the average 12-month price target sits at 870.91p, suggesting potential growth of nearly 37%. A discounted cash flow (DCF) calculation backs up these estimates, suggesting there could be another 59% growth before estimated fair value is reached.

One to watch

While the FTSE 100 exit is a blow, it could be the wake-up call the company needs. With new management and a refocused strategy, I wouldn’t rule out a decent recovery in time.

For Foolish investors with a stomach for volatility, Burberry might just be worth trying on for size. It might not be a comfortable fit for a while, but as the market has shown time and again, sometimes the best opportunities are the ones out of fashion. I’ll be adding the stock to my watchlist.

The post After falling out of the FTSE 100, what’s next for Burberry? appeared first on The Motley Fool UK.

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Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.