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(SUZANNE PLUNKETT/Reuters)
(SUZANNE PLUNKETT/Reuters)

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Why Burberry’s on the discount rack Add to ...

Burberry’s share-price fall looks harsh in the context of a modest cut in earnings guidance. But the ugly markdown may be justified.

Shares in the British trench-coat maker fell 21 per cent on Tuesday, the worst performance in the stock’s 10-year history, after it warned on sales and profit.

Burberry’s is not just a China problem: Britain’s biggest luxury-goods outfit says worsening economic conditions mean fewer customers are coming through its doors worldwide.

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With sales growth at established stores grinding to a halt, the company sensibly plans to rein in spending on things like travel, new hires and IT projects.

Burberry now reckons pretax profit for the year ending March, 2013, is likely to match the gloomiest analysts’ forecasts. Since the previous consensus was for about £432-million ($675.6-million) of pretax profit, with the lowest estimates at £407-million, Burberry is effectively guiding to a 6-per-cent undershoot.

Given net profit would probably fall a similar amount, Burberry stock fell about 15 percentage points more than is directly explained by its warning. Some of the excess can be put down to shock. But the bulk of the fall probably came as investors reconsidered Burberry’s premium valuation.

Even by the sector’s lofty standards, the company has enjoyed a rich rating in the past.

Before Tuesday’s shock it traded at nearly 18 times forward earnings, 18 per cent above its major continental rivals, StarMine data show.

True, Burberry is one of the sector’s few plausible M&A targets of scale, and can point to impressive returns on capital.

But investors must be wondering whether Burberry can continue to outshine its rivals.

With the euro zone in turmoil, China slowing and the world economy wobbly, luxury goods giants have been bracing for harder times.

In May, Hermès chief executive Patrick Thomas told Reuters that 2012 would be “a very difficult year.”

Burberry is the sector’s first big European player to feel the shock hit.

Judging by the fact that investors marked down the share prices of Burberry’s peers, it seems they fear it might not be the last.

 

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