Down 75% in 18 months, is Burberry's share price poised for a major rebound?

I Burberry (LSE: BRBY) share price has fallen by 75% in just a year and a half. To add salt to investors' wounds, the dividend has been suspended and the stock has been downgraded to mid-cap. FTSE 250.

But after a descent that feels longer than one of the brand's trench coats, is it finally possible to see the bottom? And could a major recovery be on the cards? Here are my thoughts.

Product superiority

When I was younger, some items (especially scarves and caps) were not associated with the wealthy consumers that Burberry wanted. I remember seeing a motorcycle doing a wheelie down the street with the rider completely decked out in a Burberry check (real or otherwise).

In fact, a 2011 book by Owen Jones called Chavs: Demons of the Working Class he had a Burberry-style checked hat on the cover. These associations have had a negative impact on the brand image, to say the least.

In response, and as part of a wider trend in the luxury sector, the company is reducing the visibility of its testing pattern; licensing deals have been tightened to give it more control; and focuses on premium and high-end fashion. This strategy has successfully restored the status quo it should have had at that time.

However, in recent years, Burberry has aimed to position itself as a high-end luxury label. Although ambitious, this initiative has faced significant challenges.

The stock looks cheap

The high prices make it comparable to the likes of Gucci and Louis Vuitton. But customers have been slow to accept this, especially during a crisis in the cost of living and consumer spending in China.

In Q1, sales fell 22%, and if that trend continues, the company said it will report an operating loss for H1. Chief executive Jonathan Akeroyd suddenly quit and dividends were issued.

Looking ahead, retailers expect revenue of around £2.4bn this financial year and next. At the current share price, this gives the stock a low price-to-sales ratio of 0.93, making it look cheap.

However, it is important to note that this forecasted amount is below the level achieved in 2019. Although the luxury goods sector is in a critical situation right now, I find this lack of growth discouraging.

Two decisions

According to Bernstein analyst Luca Solca, Burberry has two options. One is to follow the example of the US brand Coach by appealing to a wider audience. The second is farming with a strategy to increase productivity.

If it is a 'British coach' strategy, I think a big change in Burberry's share price is possible. Especially when the broader luxury sector is finally moving back.

The hiring of former CEO coach Joshua Schulman points strongly in this direction. As Solca says: “You can't raise prices with one hand and sell £1bn worth of factory outlets with the other“.

My decision

Can Burberry step out of the luxury trenches? I don't know, but I would at least like to know what its strategy is before I consider investing. I think we will know more in November when the company reports its H1 results.

The stock looks cheap, but there is too much uncertainty to confidently expect a strong rebound. So, I'll be buying more shares of Burberry as the seasons change and we all start reaching for our outerwear.