value and opportunity

A couple of weekes ago I had looked at luxury stocks as potential short opportunities and Michael Kors as a potential short but decided against it for the time being.

Yesterday, Burberry, the UK luxury Group issued relatively weak numbers and the share price dropped by some -20%.

Let’s look what they say in their original press release:

Against strong comparatives last year, retail sales growth at constant exchange rates was 6% in the 10 weeks to 8 September 2012. Of this, new space contributed 6% while comparable store sales were unchanged year-on-year, with a deceleration in recent weeks. Ahead of the key retail trading period in the second half, Burberry currently expects adjusted profit before tax for the twelve months to 31 March 2013 to be around the lower end of market expectations.

So no same store sales growth anymore for a company with P/E 20, P/B of 5.5 and EV/EBITDA of ~10 before the drop. According to Bloomebrg, Burberry’s largest regional market is Asia with around ~36% of sales, Europe is only ~30%.

Predictably, Burberry released today that Directors have bought stock, but it seems to be that asian luxury spending, at least for Burberry has turned the corner.

Other companies which ride the Asian Consumer trend like Hugo Boss and Prada suffered as well.

I am sure there will be a certain bounce back especially for Burberry, but it looks like that momentum is turning against those stocks and it might be time for a short. There will be surely many people who think this is only temporary and buy those stocks with a nice “discount”, but experience shows that if momentum breaks once, it will go down for a long time. And without significant growth, many of those companies are highly overvalued.

I am currently thinking of shorting a “basket” of 5 Asian focused luxury stocks, most likely Boss, Tumi, Remy Martin, Burberry and Prada with 0.5 to 1% each.

I will start with a 0.5% short Position of Prada at today’s VWAP.