☀️☕️ Burberry Checked by Luxury Slowdown

📝 Focus

• Burberry Checked by Luxury Slowdown

📊 In the Markets

• Blackstone’s Loans of Money Backed by Loans

• PLUS Xpeng, Alibaba, Walmart and X,X,X

📖 MoneyFitt Explains

🎓️ Company Revenue and Profit “Guidance”

📝 Focus

Burberry Checked by Luxury Slowdown

Burberry, London’s leading listed luxury fashion brand with that distinctive plaid check, warned it would probably not reach its own revenue guidance🎓 and hinted at a potential drop in full-year profits by saying it would come in at the “lower end” of the wide range of forecasts from The City’s Finest. 

Despite a 4% revenue increase to £1.4bn in the first half of the fiscal year, Burberry saw a 15% drop in operating profits. Same-store sales in the September quarter stalled to 1% growth from the 18% seen in the previous quarter. 

Burberry’s poor results are a reminder that the narrative that the wealthy would stay insulated from the soaring borrowing costs and inflationary pressures facing the rest of us is well and truly over.

..... ▷ The company attributed the downturn to high inflation and cost-of-living pressures affecting consumer spending.

This warning of a luxury slowdown echoes similar concerns from other luxury giants, including Richemont and LVMH in recent months and reflected in share prices that have been falling since the second quarter of the year.

..... ▷ Burberry is the only British member of the STOXX Europe Luxury 10 index* but is still not quite in the league of luxury must-have giants like multi-branded Kering, Richemont and LVMH or single-branded Hermès.

It may have a classic “heritage” look but still relies on more volatile fashion demand than on the more stable business of classic handbags, which may explain some of its lower valuations versus the luxury giants.

It’s rated closer to the newly-combined American luxury group Tapestry, the name behind Coach, Versace and Jimmy Choo, which also recently cut its forecasts on weak demand.

Consensus Forecast P/E Ratio

Burberry 15.6x

LVMH 24.2x

Kering 21.8x

Hermès 42.1x

Tapestry 13.7x

Data from Google Bard

Hence the strategy from last year of selling higher-margin leather goods and accessories, but the results have yet to materialise. New creative director Daniel Lee from Bottega Veneta (and Bradford) may make a difference.

Will the discount narrow with Burberry going up, or the others coming down? Or will it get cheaper or stay at the same discount forever?

..... ▷ Founded in 1856 by Thomas Burberry, the company gained a reputation for quality and craftsmanship with its gabardine trench coats, used by British officers and soldiers during World War I. It later became a favourite among celebrities and fashion icons such as Audrey Hepburn and Marilyn Monroe.

After stagnating as a simple clothing manufacturer with a venerable brand, a new CEO introduced a strategy in 1997 to elevate Burberry, a full luxury fashion brand with a strong heritage and a modern appeal. 

The new Burberry was an early adopter of digital marketing, using social media, e-commerce and online advertising to reach new customers and enhance brand awareness. Early collaborations included Emma Watson and Kate Moss.

The famous plaid check (not a tartan) was originally designed as a lining for its raincoats but quickly became popular as a fashion fabric in its own right. The check is now one of the most recognisable symbols of the Burberry brand.

* The STOXX Europe Luxury 10 index (in order of weighting)

LVMH (France); CIE FINANCIERE RICHEMONT (Switzerland); HERMES INTERNATIONAL (France); KERING (France); FERRARI (Italy); ESSILORLUXOTTICA (France); MONCLER (Italy); BURBERRY (Great Britain); CHRISTIAN DIOR (France); BRUNELLO CUCINELLI (Italy)

🇸🇬 Singapore: Let’s Get MoneyFitt!

📊 In the Markets

In Thursday trading, Hong Kong gave back some of its storming Wednesday gains as overnight US markets flattened out. 

Xpeng fell 3.9%, leading fellow HK-listed electric vehicle stocks Nio, Li Auto and BYD lower. The Chinese EV company reported a 63% wider quarterly loss despite a 25% jump in revenues on a 72% increase in vehicle sales. 

Alibaba was off 2.2% in HK trading, but the US-listed shares in ADR form later fell over 9% as it announced weaker-than-expected third-quarter results and the shelving of its cloud unit spinoff on AI chip supply uncertainties. Alibaba Cloud is the third-largest cloud provider in the world, after Amazon Web Services and Microsoft Azure and was seeking a valuation of $40-50bn. 

The spinoff was part of the breakup into 6 units of Jack Ma’s giant eCommerce and tech conglomerate proposed back in March. It also ditched the listing of its Freshippo supermarket business ($4bn) on lukewarm interest from investors. The breakup at the time was greeted very positively for unlocking heaps of value, but general investor optimism over China’s reopening has since evaporated.

European markets also closed lower on Thursday on the same cooling of the previous day’s bullishness plus the weakening oil price. London led the major markets down with its Oilies, as well as an 11% drop in its leading luxury brand, Burberry (above.) 

Oil prices hit their lowest since July, suggesting OPEC+ will discuss prolonging and deepening production cuts at their next meeting in just 10 days. Brent crude, the global benchmark, plunged 4.6% to $77.42 a barrel, taking it under the $80 price that starts to stress out government budgets in Saudi Arabia and Russia.

Over in the US, the S&P 500 and Nasdaq saw slight gains, with pressure from tech and retail leaders Cisco and Walmart offset by weekly jobless claims that rose more than expected, supporting the bullish view that the Fed is done raising rates.

Networking equipment maker Cisco's 9.8% stock drop followed reduced full-year forecasts amid slowing demand. Cybersecurity company Palo Alto Networks fell 5.4% on lower-than-expected second-quarter billings. 

Walmart's shares sank 8.1%, wiping out $37bn in market value, as it reported cautious consumer spending due to inflation, higher interest rates and dwindling household savings as the holiday season gets underway… while at the same time raising its forecast for sales and profit. 

The company has successfully used its size to keep prices low across the board, including its important grocery business, which pulls in not just low-income shoppers but also higher-income consumers feeling the pinch and looking for cheaper options. And once in, all shoppers may also pick up the higher margin non-grocery items Walmart’s also been building up.

WMT results pulled the S&P 500 consumer staples index down and sent both Dollar General and Dollar Tree down by 4.2%. Target, however, maintained its 17.8% previous day’s gain from a strong holiday-quarter outlook despite also flagging some warning signals. 

Semiconductor equipment maker Applied Materials fell 7% in after-hours trading on reports from Reuters that it is under US criminal investigation for potentially evading export restrictions on China's top chipmaker SMIC.

And today in Musk: IBM said it was immediately suspending all advertising on Elon Musk-owned X after a report found that its ads were placed next to content promoting Adolf Hitler and the Nazi Party. (Apple, Oracle and Comcast’s Xfinity ads had similar placement.) 

This comes a day after Musk tweeted: “You have said the actual truth.” agreeing with an antisemitic post on his social media platform X that claimed that Jewish communities push “hatred against Whites.” On Wednesday, he also attacked the antisemitism-countering Anti-Defamation League, who he has accused previously without evidence of being responsible for the precipitous drop in advertising on X. 

After just one year under Musk’s ownership, X is valuing itself at $19bn, compared to Musk’s $44bn acquisition price, based on the price at which it was awarding equity, or restricted stock units, to employees.

Blackstone’s Loans of Money Backed by Loans

In the fast emerging private credit space in which funds instead of banks lend money out to borrowers who can’t get bank loans at even higher than normal lending rates, Blackstone is borrowing money backed by loans that it has made so that it can make more loans to those sorts of borrowers.

More specifically, it is using its existing loan portfolio as collateral to secure a new loan in the form of a Collateralized Loan Obligation (CLO). The firm then uses the proceeds from the CLO to originate more loans, expanding its private credit lending business.

This is how it works in five easy steps:

1. Blackstone's private credit team identifies companies that need financing, and the BCRED fund lends money to them. These loans typically have higher interest rates and much stiffer terms and conditions than traditional bank loans due to the perceived higher risk since banks aren’t lending to these borrowers.

2. Blackstone gathers a collection of these loans and places them into a collateralised loan obligation (CLO) structure to raise additional funds for more private credit lending. A CLO is a structured financial instrument that pools together loans and, as a special purpose vehicle, issues bonds backed by those loans to investors.

3. Investors such as institutional investors (e.g. pension funds, insurance companies) and hedge funds purchase the CLO bonds, essentially providing Blackstone with new capital. The interest payments from the loans held in the CLO are used to service the CLO bonds and provide returns to investors.

4. With the proceeds from the CLO bond issuance, Blackstone can originate more loans to businesses, expanding BCRED’s private credit lending activities. 

5. Rinse and repeat, and don’t even think of asking, “what could possibly go wrong?”