After exiting the FTSE 100, what's next for Burberry?

In dramatic situations that will make even its coat-wearing models raise an eyebrow, Burberry (LSE: BRBY) has found itself unceremoniously exited FTSE 100 index.

This fashion faux pas comes after a year that has not been very stylish for the British luxury brand. With its share price down nearly 70% over the past year, the firm's market value has fallen faster than a cashmere sweater in a hot tub. But like savvy Fools, we know that one season's fashion disaster can be next season's must-have. So, let's take a closer look.

From catwalk to catfight

Burberry's fall from the FTSE 100 is more than just a symbolic blow. It closes a challenging year that has seen the brand struggle to maintain its popularity in a competitive market. The company reported a 22% drop in first-quarter retail revenue, while same-store sales fell 21%.

Burberry recently replaced CEO Jonathan Akeroyd with Joshua Schulman, a veteran executive with a track record of high-end and ambitious luxury. Schulman's job? To turn Burberry into a brand with a wider appeal.

This change at the top could be just what Burberry needs to regain its mojo. After all, in the ever-changing world of fashion, sometimes fresh eyes are needed.

But clearly, the luxury market is still a dangerous place. Local concentration, especially in China, exposes the company to regional economic fluctuations and national tensions. Currency risks, performance challenges under new management, and stiff competition all add to the mix.

Numbers

Burberry's current price-to-earnings (P/E) ratio stands at a relatively modest 8.6. For some, this may suggest that the market has oversold stocks, which could set the stage for a retracement.

However, profit margins were affected, falling from 15.8% last year to 9.1%. On the other hand, revenue is predicted to grow by 5.1% annually. Such numbers may not please many potential investors, but they represent steady growth.

I think it's important to realize that a company's problems don't happen in isolation. The entire luxury sector was facing difficulties. Companies in this sector returned an average market performance of -56.9% last year, but Burberry managed to do even worse at -68.7%.

However, this is where it gets interesting. Analysts seem to think that the company has a bright future ahead. As the company begins life in the FTSE 250 Indicative, the 12-month price average sits at 870.91p, suggesting a potential upside of around 37%. A discounted cash flow (DCF) calculation supports these estimates, suggesting that there may be another 59% growth before the estimated fair value is reached.

One to watch

While the FTSE 100 exit is a mistake, it may be the wake-up call the company needs. With new management and a refocused strategy, I can't pull off a decent recovery in time.

For naive investors with the stomach for volatility, Burberry may be worth trying on for size. It may not be a comfortable fit for a while, but as the market has shown time and time again, sometimes the best opportunities are the ones that are out of fashion. I will be adding the stock to my watch list.