Investors are bailing as Burberry shares go out of fashion

A profit warning and a share price drop have given Burberry a tough start to the year – and the city believes things will get worse before they get better.

Hedge funds have been swooping in on the luxury fashion house since mid-January when it admitted that Christmas sales had been weak. The FTSE100-listed company had first sounded the alarm during trading three months earlier.

Nearly 5 percent of the shares have now been lent to short sellers – including Mayfair hedge fund Marshall Wace – who will make money if the share price falls. At the beginning of this year this was less than 1 percent.

Short positions against Burberry have not been this high since 2016, a turbulent year marked by falling profits, disgruntled investors and a boardroom shake-up that led to the resignation of Christopher Bailey as CEO.

Analysts are focusing on the company, known for its distinctive check, with a long list of banks including Goldman Sachs, Stifel, HSBC, Barclays, RBC and Jefferies all cutting price targets on its shares.

The brand was founded in 1856 by cloth merchant Thomas Burberry and is best known for its trench coats. The company had to regain its cachet as a high-fashion icon for years after the famous checked pattern became popular with football hooligans.

According to RBC analysts, Burberry has ‘the building blocks’ ready for the next phase of its makeover. But they add that a “less favorable luxury and macroeconomic backdrop” could prove more challenging in the short term.

Luxury stocks got a boost last week when LVMH reported strong results, although the figures also showed that sales growth was slowing – an indication that the sector is not yet out of the woods.

LVMH is helped by the fact that it has a plethora of brands, including Louis Vuitton, Christian Dior and Moet & Chandon. This means that even if one part of the market lags, there is a good chance that other parts of the market will flourish.

Burberry, on the other hand, will always be hampered by the fact that it is a one-brand company. Sophie Lund-Yates, chief equity analyst at Hargreaves Lansdown, said: ‘Large listed conglomerates have a full range of brands, meaning there is less volatility and less vulnerability to changes in spending.’

She added that Burberry – led by Jonathan Akeroyd – is more exposed than other luxury goods groups to “aspirational” shoppers who are not wealthy and are forced to rein in their spending. Burberry has also adopted a strategy of raising prices, which may not end well. And then there is the question of whether people like the designs.

There has been a muted response to recent lines designed by chief creative officer Daniel Lee. Burberry could be a takeover target. Whatever happens, this will be a pivotal year for the company.