Burberry shares: undervalued FTSE gems that are ready to rocket?

Despite being sorely tempted, I count my lucky stars I didn’t buy Burberry (LSE: BRBY) shares over the past year. But a recent development means I now find myself taking a fresh look at the stock.

Terrible 2024

The former FTSE 100-listed company’s woes are well known. High inflation and a cost-of-living crisis have hammered sales of luxury goods, particularly in vital markets such as China. This has led to two profit warnings and the company parting ways with former CEO Jonathan Akeroyd. On top of this, dividends have been suspended, pushing the share price down even further. A multi-year low of 555p was set in September.

Since then, we’ve seen a revival of sorts. Interest rate cuts in the UK and the US, not to mention a stimulus programme in China, are likely to have played a role in the 20%-odd gain seen in the last month.

But something else has now got the market excited.

Bid target

On Monday (4 November) it was reported that Italian peer Moncler might bid for the UK company.

The initial rumour appears to come from the trade journal Miss Tweed. Apparently, luxury giant LVMH — owner of Louis Vuitton and Dior, and investor in Moncler — is looking for the deal to go ahead.

Unsurprisingly, Burberry’s share price jumped on the day while Moncler remained tight-lipped on whether it intended to make an offer.

No sure thing

At this point, it’s worth remembering that many companies deemed takeover targets never receive bids. Even if these arrive, they might be rejected. A board might believe it can get a better price for shareholders. Or it might think a strong recovery in trading is imminent and that everyone should sit tight.

As an example, property portal Rightmove slammed its door in the face of a potential suitor (four times) a month or so ago. And this rejection has seemingly impacted investor sentiment since.

Interestingly, Burberry shares were down over 6% at one point this morning (5 November). Does that mean the rumour will come to nothing? Possibly. And this price movement demonstrates why I try to avoid buying stocks solely because someone, somewhere has suggested a deal is imminent.

As always, I buy with the intention of holding any shares for the long term.

Here’s what I’m doing

Removing the rumours of an imminent takeover, I do think Burberry stands a decent chance of recovering eventually. Whether it can ever recapture previous highs is another thing entirely.

Personally, I’d like to see the company pivot away from excessive discounting, which devalues the brand. Its markdowns may currently be a direct effect of its move further upmarket during a luxury downturn, with high-priced product not selling and ending up in outlet stores. So it may need to rethink pricing too in order to drive more full-price sales.

But the problem is that outlet stores contribute an awful lot to sales and eventual profits. As such, I don’t envy management when it comes to making a decision.

With no easy solution, I think there could be more volatility ahead. Indeed, this may be why Burberry remains a favourite among short-sellers.

So, I’ll continue monitoring developments for now. If I do buy, it will be with the intention of building a position slowly.

This post was originally published on Motley Fool

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