As Burberry prepares to rejoin the FTSE 100, could the stock be the next Rolls-Royce?
Rolls-Royce has been the top-performing FTSE 100 stock of the last five years. Its success has been driven by a combination of a better trading environment and internal improvements.
By contrast, itâs been a tough few years for Burberry (LSE:BRBY). But the company could be set to benefit from a similar combination of positive forces to the ones that propelled Rolls-Royce.
Internal improvements
Burberry has made a number of key strategic and operational changes over the last year. And these are a major reason why the share price has more than doubled.
The firm has shifted its marketing focus and looked to concentrate on its core outerwear, scarves and leather goods. And newish Chief Creative Officer Daniel Leeâs latest collections have been well-received.
Operationally, Burberry went from losing money during the first half of 2024 to profitability in the second. A lot of this was due to cutting costs, where the company is aiming to save £60m.
I think this is encouraging, but the firm will only be able to boost profits with cost reductions for so long. Sooner or later, the ongoing decline in revenues is going to have to reverse.
Trading environment
There are, however, good signs on this front. Over the last few years, weak demand from China â one of the companyâs largest markets â has been weighing on overall sales.Â
But the economic backdrop could be starting to improve. Earlier this week, Erwan Rambourg at HSBC upgraded LVMH and Kering to Buy, citing accelerating demand from China.
The bank also has a Buy rating on Burberry shares and raised its price target in May from £8.80 to £12.50. Thatâs roughly where the stock is now.
Without sales growth, I think the rally in the Burberry share price is going to prove unsustainable. But improving demand from China could be just whatâs needed to get revenues growing again.
Combined forces
When an improved business meets with a favourable trading environment, the results can be spectacular. But investors need to make sure theyâre not getting ahead of themselves.
Companies like Burberry are naturally prone to ups and downs that are beyond their control. The impact of weak consumer confidence in China is a good illustration of this.Â
This is an important risk to pay attention to, especially from a long-term perspective. But it can also create opportunities for investors to buy the stock at bargain prices.
Burberryâs share price has doubled in the last 12 months, but itâs still 50% below where it was in 2203. So there might still be an opportunity to benefit from a rebound in the companyâs fortunes.
FTSE 100 readmission
Burberry is set to rejoin the FTSE 100 later this month. And this news might well be causing some unusual amounts of interest in the stock as index funds prepare to buy it for their portfolios.
As a result, Iâm looking to wait until the dust settles a bit before thinking about it in the context of my own investing. And the firmâs next update in November will be crucial.
The most recent update indicated that sales declines have all but stopped. So if the company can get back to growth, I think the stock could react very positively and may be worth considering.
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HSBC Holdings is an advertising partner of Motley Fool Money. Stephen Wright has positions in LVMH Moët Hennessy – Louis Vuitton, Société Européenne. The Motley Fool UK has recommended Burberry Group Plc, HSBC Holdings, and Rolls-Royce 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.
