During the said period, Burberry shares have gone through immense volatility with the shares moving as much as 5% in a single day, example include the red dots in the graph above. On an overall basis, the shares have gained around 10% since the last 6 weeks which could have been near 30% had the share price not fallen within the last couple of days.
A share price gain of 3% was observed on Oct 12th as the company announced its earnings in the 2nd quarter and the revenue beat expectations marked by the green dot. The main reason for the rise in the share price was however the better than expected revenue figures from China. China is currently the engine for global economic growth and any company having a foothold in China is poised for growth.
However, what is alarming is the decrease in share price that is seen in the last 2 days. This is despite the fact that the company has seen in the graph (blue line).
The only reason that sheds light on this is the current European crisis. Burberry even though making great inroads into China, is still very much a European brand and any bad happenings in Europe will definitely have a spillover for any luxury brands. Hence I believe the investors are more than concerned about the European affairs are being run and this give the investors a run for their money. Already Greece is said to be in tantrums as it is yet to pass the austerity measures that will be required for it to receive the next tranche of the EU Bailout. These tranches are important as they will allow the country to make the debt servicing payments that are due by the 15th of December. However it seems that the protests and the people on the streets spell otherwise. Moreover a government change has already been affected shedding light on how bad the situation really is. The Greek government is already contemplating layoffs and has increased the retirement age and this is not going down well with people who have taken to the streets (Haan 2003).
Not only is Greece is in trouble but there are other countries in Europe as well that are going through a similar mess. Countries such as Britain itself, Spain, Italy and Portugal are all suffering through mounting debts and are teetering on default (Koch 2011). The latest country that has come in the spot light is Italy which has also seen a government change. Moreover, Spain and Portugal are both being closely watched. However It is Italy that is important as of now as it is a relatively large economy than other countries and is in fact one of the top ten economies of the world .
Hence bleak economic times for the European economy seem to be in order. Now given that the economy is not expected to do well, what do we say about luxury stocks such as Burberry? In times of recession, it is the luxury goods that get hurt the most. Its human psychology. Whenever, we are in financial trouble, we cut our expenditures on luxury goods. Those 200 bucks we were going to spend on a designer bag will quickly be put under the pillow for the bad times that are expected to come ahead. Given that Burberry is a purely luxury brand, this does not spell out too well for the company. The company has already seen a great contraction in its share price over the last week as the company has lost nearly 10 percent in value. Maybe the investors have just become aware of the effect the recession might have on the luxury brand and have started a selloff. Given the European economic situation and the fact that it is only going to get worse, I recommend that that Burberry be SOLD.