“We need to identify brands which are so desirable that no matter how people shop or receive advertising, they’ll always want them.”
- Lindsell Train
Well-known British investor Lindsell Train once said the above when referring to the luxury sector as being most resilient to technological disruption and the aftermath of moat erosion. Indeed, many value/quality investors, including us, look for the lack of change to be their primary driver of long-term equity returns.
Previously, we discussed investments that are well-moated through century-old brands, of which we see many related to luxury lifestyle. After all, it would be challenging to imagine losing with these products that have survived multiple wars, political turmoil and economic shakeups. The margin of safety inherent in an iconic heritage’s share of mind among price-insensitive customers is the primary factor making us so comfortable in this space.
Of course, a good defense alone makes a good investment, but not a great one. The room for value-generative secular growth is necessary for competitively advantageous businesses to compound shareholders' wealth at a superior rate in the long run.
Whith more than 150 years of history, Burberry (LSE:BRBY, Financial) is one of the companies balanced with a reputation-based moat and an internal source of growth. Hermes (XPAR:RMS, Financial) and Johnnie Walker (LSE:DGE, Financial), which we covered in the past, also fit this definition.
Based in the UK, Burberry specializes in the design, manufacturing and marketing of top-of-the-line clothes and accessories. Its long history spans across the times when the company supplied military apparel for the British army throughout both world wars and official outerwear for the British Olympic team.
In terms of financials, Burberry has generated super-normal free cash returns on assets since the 2008 financial crisis, approximately matching the performance at Hermes and outperforming LVMH (XPAR:MC, Financial) (see below).
As indicated below, the business at Burberry was mildly impacted by economic conditions during both of the previous two recessions.
Looking forward, we think that Burberry can be well-positioned to take advantage of the megatrend of digitalization. According to a report by Lindsell Train, almost 10% of Burberry’s sales now come from e-commerce, compared with nearly 7% at LVMH and Tiffany (TIF, Financial) as well as less than 2% at Richemont (XSWX:CFR, Financial), which owns Cartier.
Geographic expansion is another internal source for growth at Burberry. For example, take a look at China, which represented nearly 17% of the company’s fiscal 2019 revenue. A previous study by Bain Consulting indicated that the Chinese market accounted for approximately one in three personal luxury purchases in 2017. It can be reasonable to expect such as ratio to climb, given the vast gap of the average luxury spending per capita between China and the U.S. or Japan.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Hermes.
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