Burberry Share Price Still Suffering Despite Economic Optimism

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Burberry’s share price has halved over the past year despite rising national wages potentially boosting consumer spending.  The luxury brand now rests around 1,200 just above decade-old support levels that if broken could result in a further move down.

UK Nominal Wage Growth Better Than Expected

In the UK, wages are rising again. Latest data from the Office of National Statistics (ONS) today showed that annual pay growth has stopped falling. From its recent floor, annual wage growth topped 6 percent (see below). Even the ONS is surprised, and remarked on X (formerly Twitter) that the annual growth “remains relatively strong.” 

In real terms, wage growth is near its highest level in many quarters. Unsurprisingly, economists are dialling down the probability of a near-term rate cut.

Just last week, the Bank of England maintained the Base Rate of 5.25 percent in a ‘wait and see’ stance. Nevertheless, markets rallied on hopes a summer rate cut. False hopes, perhaps.

At this point, nobody can say for certain the path of future interest rates. Everything hinges on macro data. Yet macro data is messy. One day bullish; next day bearish. The yo-yo mentality will continue to plague the market.

Source: ONS/X (Twitter)

If UK pay growth is this good, by some logic, is it time to buy consumer-related UK stocks?

Well, not so fast. The past few years saw many retail stocks raze to the ground by consumers’ thinning wallet and depleting savings. Asos (ASC) is one such bombed-out stock. From £60 in 2021, the stock currently trades at £3.5. Ouch!

Burberry Share Suffer Worst Fall Since Pandemic

Even the high-end retail segment is not immune. Burberry (BRBY), one of UK’s independent luxury brands, suffered a huge fall over the past year. From £26 in June 2023, the stock plunged by more than 50 percent to trade these days at £12. Technically, this fall is bigger than the vertical fall recorded during the 2020 pandemic (see below). In November (’23) and January this year, each trading update saw Burberry slump 10 percent. In the last update, for instance, the CEO wrote to investors:  “We experienced a further deceleration in our key December trading period and we now expect our full year results to be below our previous guidance.” 

Lower growth, lower profits and less customers all sapped confidence in the fashion house. According to FCA data, Burberry is now the third-most shorted FTSE 100 stock, behind Ocado (OCDO) and Kingfisher (KGF). For the company, the post-pandemic luxury boom is over.

Given the widespread pessimism on it, should we take a punt on the stock? There are pros and cons to this.

On the positive side, Burberry stock is very oversold. A 20 percent rally from here is possible. Any good news on the macro front may further amplify this upswing. Two, the global economy may not be as bad as projected. Burberry is global company and derives its revenue in many countries.

The downside risk, however, is that Burberry’s short sale contraction is not yet finished. What if the luxury segment is just beginning its multi-year slide? Well, if that’s the case Burberry may break the key psychological 1,000p support level later this year. Price volatility on each trading update is high – simply because investor expectations on the company is skewed to one side.

In all, there’s a case to be made for a trading buy here. Just that this trade must be a discipline one with appropriate risk management (stops/size).

(Burberry’s next trading update is 15 May 2024, as stated on its website).

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