Burberry shrugs off drop in tourist trade and WH Smith builds a cash buffer

“The inauguration of President-elect Joe Biden later on Wednesday will draw focus on to the big stimulus plans outlined by the incoming administration but trading in Asia overnight and Europe suggests the course of the pandemic is still creating plenty of nervousness among investors,” says AJ Bell Investment Director Russ Mould.

“The FTSE 100 managed to eke out some gains early on but they were modest and after a brief spurt higher at the start of the year, the index has stalled.

“We could be stuck in a kind of limbo until there is an indication on when lockdowns might start to be eased. This involves different factors from the pace of vaccine rollouts to political judgements on the levels of risk which are acceptable.

“Oil and gold prices were up, presumably in the expectation that Treasury Secretary nominee Janet Yellen’s call to ‘act big’ on US stimulus efforts could stoke inflation.”

Burberry

“Burberry’s latest update shows how dependent it is on the tourist trade. It needs wealthy people to be travelling to different countries and shopping as part of their itinerary. Its stores are often key destinations and picking up some of its chequered products has become second nature for many wealthier individuals.

“Travel restrictions imposed as part of lockdown measures in various parts of the world are hurting its sales, particularly in the broader EMEIA region which covers Europe, the Middle East, India and Africa.

“Unfortunately turning the travel taps back on won’t be an instant solution for one of its key regions. The end of VAT refunds for non-EU tourists is going to have a negative impact on UK sales and so Burberry needs to find a way of making its UK stores and product pricing more attractive.

“Against these challenges, there are plenty of reasons for Burberry to be looking smart. It is seeing decent growth in full priced items and is picking up a new generation of customers with younger clientele helping to drive sales as well as repeat business from existing customers.

“Online sales growth is also very impressive, particularly in mainland China. Furthermore, it has struck gold with signing up footballer Marcus Rashford to a recent marketing campaign. He is seen as a hero to people across the UK for his role in fighting child food poverty. Naturally his association with the brand will have placed Burberry in a favourable light with a lot of people.”

WH Smith

“For now the market seems to be retaining its belief in WH Smith’s ability to bounce back from the pandemic.

“Supporting this optimism is the liquidity position reported in today’s trading update with the company generating cash in both November and December – no mean feat given the backdrop and at current rates of cash burn giving the business appreciable breathing space.

“The high street operation, long considered the ugly stepchild of the group, has actually performed creditably. December sales weren’t too far off 2019 levels and many of these stores remain open in the current lockdown, including those located in hospitals and those with post offices.

“WH Smith’s experience in recent years with this part of the business has also supported its ability to conserve cash and keep a tight rein on costs. Management have consistently driven down expenditure in the high street arm as they managed a steady decline in sales, even if this meant its shops often came towards the bottom in surveys of customer experience.

“The growth story until the Covid-19 pandemic was all around the travel business, where the company has been able to capitalise on a captive audience and charge more for its products.

“The timing of a return to anything like previous levels of trade for these outlets in train stations and airports is uncertain but WH Smith will hope that like the rest of the travel sector it can benefit from pent up demand when restrictions are loosened.”

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