Companies like Burberry (LSE:BRBY) have a long and proud history. First established in 1856, it has been listed on the stock exchange since 2001. Yet over the past year, the FTSE 100 stock is down 67%. It currently trades at levels not seen since April 2010.
I have stayed away in the past, but am trying to assess how low the stock could go.
Not feeling the love
Part of the reason why I think it has further to fall is the the divergence between the stock and the broader economy. What I mean by this is that Burberry is a customer-facing fashion brand. So when people are doing well and feeling optimistic about the economy, they will likely spend more at places like Burberry.
Data out last week showed that UK retail sales rose by 0.5% month on month. The consumer confidence figures for July hit the highest level since September 2021. So it’s clear to me that sentiment is quite good right now. Yet the Burberry share price is still falling.
The support of the strong data should act to help the stock to rise. The fact that it’s not helping tells me that there must be a lot of investors selling right now. It’s not a great indicator for the coming months, potentially suggesting there’s further room to fall.
Expecting a drop in earnings
When trying to assess specifically how low the stock could go, it’s tricky. Based on the last annual report, the price-to-earnings (P/E) ratio is 9.48. However, I expect the updated earnings per share to be much worse.
Based on my rough calculations, I’d expect the earnings per share to drop from 74.10p to around 48p. This factors in an expected 35% fall in revenue, with this filtering down to the bottom line. I’d also expect the P/E ratio to stay around 10. So using those figures, that would put the share price down to 480p.
After this point, I’d expect cost saving measures and other promotional activity to kick in, enabling the finances to steady into 2025 and beyond. If realised, this should act to support the stock from materially falling lower.
The view from the other side
My view could be invalidated as the rest of the year pans out. For example, I expect the new CEO, Joshua Schulman, to set out some aggressive strategy changes and new plans. Even though this might take some time to be implemented, these ideas might be warmly embraced by investors, causing the share price to spike.
Further, if interest rates around the world are cut faster than we are expecting in the coming year, it could help to fuel more optimism in the market. This might eventually filter through to the stock price.
Even with these valid factors, I feel the Burberry share price has further to fall. Therefore, I’m staying away for the moment.
This post was originally published on Motley Fool
