Burberry shares: the FTSE 100’s best stock to hedge against inflation

If I had bought it Burberry (LSE:BRBY) shares a year ago, I would have earned 22% excluding dividends. This will allow my money to outpace inflation nicely. So, with another positive outlook in the latest Q3 update, I believe the stock can continue to outperform inflation.

An unfashionable number?

Despite just missing analyst estimates in the latest trading update, there are plenty of positive takeaways from Britain’s unique luxury company.

Although comparable store sales growth shows almost no movement, stripping China out of the figures shows a clearer picture of the firm’s underlying performance. In fact, in the three quarters reported in FY23 so far, Burberry’s sales excluding China have doubled.

And although China is the group’s Achilles heel in 2022, the road ahead will be smoother. Outgoing COO Julie Brown is bullish on the country’s prospects and cites several catalysts for its comeback:

1. Net household savings will be nearly 12.5trbn RMB in 2022, 3.5 times in 2020.
2. Government stimulus should encourage spending as interest rates remain low compared to other countries.
3. Chinese nationals make up 40% of Burberry’s revenue. By 2022, this figure will be only 25% due to the lock.

As a result, the board restated its outlook for single-digit revenue growth and gross margin of 70% for the full year, while also maintaining medium-term guidance of £4bn in revenue.

Check for authenticity

However, the biggest takeaway from the report is that customers prefer higher end items. This includes bags and leather goods. More importantly, products with a check and British Burberry style seem to perform better.

For example, the trademark square scarf makes up 60% of soft accessories sales. This is the key to FTSE 100 long-term growth stalwart. Management knows that in order for Burberry to mark its price and expand its margins, it must be authentic and stay true to its roots – England. As such, new CCO Daniel Lee is expected to push this aesthetic in a new product line next month.

premium price?

So, with strong tailwinds as China reopens, a good dividend yield, and a strong balance sheet, should I invest in Burberry stock?

Yes, the upside potential is definitely there, and City Index analyst Joshua Warner shares the same sentiment. They forecast comparable sales growth to grow by around 7.3% in Q4, with retail sales rising above 9%. That being said, it is also worth noting that Burberry shares are traded at some expensive prices.

Therefore, it is not surprising that Burberry’s share price is currently higher than the price target set by the banks. This is because price targets only have a one-year timeframe. For these reasons, the tailwinds of China’s reopening and Daniel Lee’s new collection have not been priced appropriately.

After all, Lee’s collection will only be on the shelves from September. This means that revenue growth from better products and designs will only materialize in H2 FY24. After selling the stock because of my price target, rebasing my model shows further progress, so I will buy Burberry stock in time.