Burberry is finally in fashion.
The British luxury group said late Tuesday that billionaire Albert Frere had taken a 3 percent stake via Groupe Bruxelles Lambert SA. The shares are up over 4 percent since the holding was reported.
It's not clear what the game plan is. While the company had certainly looked ripe for activist intervention, any agitator will have to be fashion-forward in its thinking. What Burberry Group Plc needs is a creative overhaul, not just a corporate shakeup.
On the face of it, it looks like Frere's arrived a bit too late. Burberry shares are up about 30 percent over the past year, as the slump in sterling has made its famous check scarves and trench coats cheaper for Asian tourists, and boosted the value of overseas earnings. There have already been some significant management changes, something that's a standard tool for a newly arrived activist.
Frere is an independent director of LVMH and a long-time business associate of the luxury giant's Chief Executive Officer, Bernard Arnault. Marco Gobbetti, who takes up the role of Burberry CEO in July, is an LVMH veteran, so Frere will know what he is capable of. Perhaps he has high hopes from the arrival of new blood at the top.
Leaving aside the potential for a Gobbetti's magic, there's still scope for Frere to employ more aggressive tactics.
Efficiency can improve, something Burberry is itself aiming at with plans for 100 million pounds ($123.2 million) of cost savings by 2019. But with its operating margin trailing those of many big luxury peers, there could be more for an investor to agitate for.
The balance sheet's also far from a size zero, so there's room for a chunky payout to shareholders.
Burberry was sitting on net cash of 660 million pounds as of March 2016. John Guy, analyst at Mainfirst, says Burberry could sell its beauty business, which could be worth about 400 million pounds. Assuming Burberry distributed half its cash balance, that would still mean more than 700 million pounds for investors, about 10 percent of its market capitalization.
Still more radical action via M&A could be in store. LVMH has long been seen as a potential acquirer of Burberry, while Coach has also made several approaches, according to the Financial Times.
Frere has a strong track record in the consumer sector. It took a stake in Adidas in 2015, where shares are up 58 percent over the past year.
But when it comes to Burberry, it will need to broaden its skill set.
As Gadfly has argued, the company needs a change of creative direction. Though Christopher Bailey will relinquish his CEO role to Gobbetti, he'll remain as creative director, a role he's held since late 2009.
The company needs a new designer to revive the brand. Just look at what's been achieved at Gucci after it appointed the previously little known Alessandro Michele last year. Gucci's revenue rose 21 percent in the final quarter of 2016, and half of the sales came from millennials. Burberry is sadly lacking that buzz.
Pushing a brand into a new creative direction is not the natural territory for activist investors. It should be.
As Gucci has demonstrated, if a label can successfully marry creativity and canny management, it can be just as effective in delivering value as more traditional activist avenues. For Frere's intervention to be a genuine success, he'd need to have this trick up the sleeve of his Burberry raincoat.
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