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In Aftermath of IPO, Burberry Shows Signs Of Split Personality

LONDON — Fashion or luxury?<br><br>That’s the identity crisis facing Burberry now that it has joined the ranks of publicly held companies. Shortly after Burberry’s Friday debut on London’s Stock Exchange, equity analysts here...

LONDON — Fashion or luxury?

That’s the identity crisis facing Burberry now that it has joined the ranks of publicly held companies. Shortly after Burberry’s Friday debut on London’s Stock Exchange, equity analysts here were asking whether Burberry should be viewed — and valued — as a luxury stock like Hermès or Gucci Group, or a fashion brand along the lines of Polo Ralph Lauren or Tommy Hilfiger.

On its first day of trading, Burberry closed down 2 percent at $3.38, and analysts and market experts alike said it was a solid debut in a shaky market. Burberry’s launch came during one of the most volatile sessions of the year with Britain’s FTSE 100 index slumping 8.5 percent over the past week and the luxury share price average down 8 percent.

The closing price values Burberry at $1.69 billion, compared with Thursday night’s initial market capitalization of $1.73 billion. (The initial market capitalization was given incorrectly in a WWD story on page 2, July 12.)

Chief executive Rose Marie Bravo, who with the rest of the management team wrapped up the road show Thursday, still holds a 1 percent stake in the company, although the value of that stake has decreased slightly in the first 24 hours.

“It was a huge achievement for Burberry to make a placement in today’s market, and their decision to go ahead with the flotation can only enhance their image. They will benefit in the long term from this move,” said Sagra Maciera de Rosen, vice president and head of the luxury goods team at J.P. Morgan Chase.

Maciera de Rosen said the 2 percent drop in Burberry’s share price was far from disappointing.

“I frankly wasn’t expecting any jump in the share price today, considering this market climate. Burberry’s performance was not bad, and most importantly it proved that there is still an appetite in the market for luxury goods,” she said.

Trading in Burberry was active on Friday, with about 30 million of the roughly 112 million public shares changing hands. The stock, fixed Thursday at $3.45, made its debut at $3.50, dropped as low as $3.29 during the day, and then rebounded to settle at $3.38. Dollar figures are converted from the pound at the current exchange.

Stock market sources said at least one institutional investor sold its shares Friday, while hedge funds got involved in the game, selling short in the turbulent market climate.

As reported, the 22.5 percent stake in Burberry was initially offered to institutional investors. Burberry’s parent GUS is holding on to the remaining 77.5 percent stake in the company. The issue was 2 1/2 times oversubscribed.

While Burberry’s management has acknowledged that these are not the best of times for the stock market, there were no regrets about the offer.

“We are delighted that Burberry is now a publicly quoted company,” Mike Metcalf, Burberry’s chief financial officer and chief operating officer, told WWD. “For the management team, it’s back to business.”

Indeed, Bravo was in Burberry’s London showroom on Friday evening, working on business plans and the upcoming collections.

Burberry had the guts to go forward when other companies inside and outside the fashion and luxury industry decided to put their IPOs on ice. Prada was set to kick off its road show earlier this month, but backed out, citing dismal market conditions. Burberry, however, stuck to the plan that it announced at the end of 2000.

But now that it’s on the market, many analysts here are wondering whether Burberry will behave more like a luxury stock — or a fashion one. Will Burberry increase its margins through more accessories sales, more directly operated stores and less reliance on apparel or will it continue to be driven by apparel and its wholesale operations?

Luxury stocks trade at higher multiples because their businesses have loftier profit margins, and a higher value in the eyes of investors. Fashion stocks trade at lower multiples because their products are more prone to the trends and their profitability is less than that of luxury companies. Additionally, luxury companies tend to keep tighter reins on production and distribution, although many higher-end fashion companies have started to emulate this model.

Right now, Burberry stock is trading at a 13 to 15 times 2003 projected earnings — a discount to the luxury sector where shares trade at 20 times earnings or more. At the same time, Burberry shares trade at a premium to fashion stocks like Tommy Hilfiger which sells at 9.4 times earnings and Ralph Lauren’s at 11.8 times earnings.

This was no accident: Burberry has always positioned itself as a middle ground between luxury titans like Gucci Group, LVMH and Hermès and more fashion-oriented companies such as Ralph Lauren.

As reported, Burberry’s sales have more than doubled to $750 million over the past two years while net profits have more than tripled to $84.8 million in the same period. Between 2001 and 2002, operating margins went from 16.4 percent to 18.1 percent.

Andrew Gowen, director of equity research for luxury goods at Lehman Bros. in London, said that right now Burberry’s business model looks more like Ralph Lauren than Hermès in terms of its pricing, product mix, and sales structure. “But the brand has more momentum than Ralph Lauren or Tommy Hilfiger,” he contended. “So the question is this: Should investors be forced to pay for that momentum by investing in Burberry stock?”

The big question with Burberry, Gowen said, is “Will the business model lead the brand, or will the brand lead the business model? This is all going to take time to work itself out.”

Another London-based analyst said he believes Burberry’s multiples are “extremely high,” and that the stock should be trading at a multiple more in line with the apparel companies. “I wouldn’t be surprised if Burberry’s valuation drifts down to $3.00. We are talking about a company that relies on apparel sales, not accessories, sales,” he said.

Another London-based analyst agreed. “Burberry is more of an apparel company which means that its profitability is going to be less than a luxury company. The benchmark for Burberry is Ralph Lauren.”