The Burberry (LSE: BRBY) share price has been a horror story for investors this year. As I write this, it’s down about 45% for the year and about 70% off its all-time highs.
Is the stock – which is no longer part of the FTSE 100 index – worth considering as a recovery play for 2025? Let’s discuss.
The fundamentals have changed
The last time I covered Burberry was mid-July. And it’s fair to say that the fundamentals have changed quite a lot since then.
Back then, City analysts were expecting Burberry to post earnings per share (EPS) of 51.6p for the year ending 31 March 2025 (FY25) and 65.2p for the following financial year (FY26). At those figures, the price-to-earnings (P/E) ratios were 14 and 11, which made the shares look quite cheap.
Today however, the consensus earnings forecasts for those two financial years are just 3p and 27.5p. In other words, analysts have slashed their forecasts dramatically.
So now, we have P/E ratios of 260 and 28. All of a sudden, the stock is not cheap at all.
I’ll point out that I highlighted the risk of earnings downgrades back in July. This is always a risk to be aware of when companies are struggling, and it remains a risk with Burberry shares today.
China is the key to a 2025 recovery
Is there a chance of a share price recovery in 2025 though?
Absolutely. But it’s far from guaranteed.
Much will depend on the economy in China, where Burberry has generated a lot of its sales (about 30%) in recent years. And there’s a fair bit of uncertainty on this front right now.
Recently, analysts at Barclays concluded that China is likely to be “weaker for longer”. Their view was that many of the growth factors driving the Chinese into the luxury goods market, such as high GDP growth and property market strength, are simply not there.
It’s worth noting that Barclays’ analysts also expressed concerns about Burberry’s ability to remain a high-end luxury brand. Given their concerns, they downgraded the stock to ‘Underweight’ (Sell) and lowered their share price target to 540p (about 30% below the current share price)
Of course, if stimulus from the Chinese government has a positive impact on the economy and consumer spending, Barclays’ view on China could turn out to be incorrect. This scenario could result in a major boost for Burberry’s sales, earnings, and share price.
At this stage, however, it’s not easy to determine what lies ahead for China in the short term. So, it’s hard to know if Burberry shares are capable of a recovery in 2025.
High risk, high reward
Given the uncertainty, I see Burberry shares as a high-risk, high-reward play on the luxury goods sector.
If the luxury market in China picks up, the shares could experience a sharp rebound. Conversely, if China remains weak, the shares could keep falling.
Personally, I won’t be buying the shares myself. I’m interested in getting some more exposure to this sector, but I think I’d prefer to go with a more diversified company to reduce brand-specific risk.
This post was originally published on Motley Fool
