With trenchcoat season nearing, this month’s re-ascension of Burberry (BRBY) to the FTSE 100 is doubly timely.
That’s because it’s been a year since I looked at the fashion house as a ‘capitulation’ stock. In this time, the shares doubled in value, halved, and then doubled again to £12. Though still lower than half their April 2023 all-time high, this marks a big shift for a company whose long-term operating profit margin of around 20 per cent had collapsed to almost nothing in around a year.
What’s happened? Beyond the ephemera around “reigniting brand desire” and customers’ reappraisal of “Timeless British Luxury brand expression”, the short answer is that the rot has at least stopped. After constant-currency sales dipped by 15 per cent in the 12 months to March, they fell by just 2 per cent in the first quarter of this financial year. It’s progress, of a sort.
Neither has the outlook dimmed further. Analysts’ adjusted earnings estimates are around 21p, 40p and 58p for the next three reporting years, respectively, which is where they were last October. That still makes Burberry a tricky company to value. But, for now, investors appear happy to accept a near-term strategy that prioritises cost savings, store closures and margin repair over sales growth.
And so it can sometimes prove with ‘capitulation’ narratives. Short of a funding or trading death spiral, a collapse in sentiment will eventually spark shareholder churn, and fresh optimism. Throw in tracker fund buying and the right noises from a new, well-respected boss, and bob’s your uncle: we’ve got a re-rating.
The same can’t yet be said for the other stock I looked at, polling and analytics group YouGov (YOU).
Like Burberry, the slide in trading conditions seems to have abated, while City earnings and sales forecasts are roughly where they were last autumn. Like Burberry, there’s a new broom in the mix (or rather, an old broom in the shape of founder and ex-chair Stephan Shakespeare, now interim chief executive).
Unlike Burberry, YouGov is listed on Aim. So while its earnings visibility is arguably better, and the shares’ valuation case clearer (on nine times forward net income, versus a 2023 peak of more than 30), investor demand hasn’t recovered. Although both stocks suffer due to longer-term strategic uncertainty, Burberry sits at analysts’ fair value estimate. YouGov, meanwhile, would need to rally 61 per cent to hit the same target.
With its share price down another 24 per cent in the past year and now trading at less than a quarter of its all-time high, YouGov remains a ‘capitulation’ situation. Rather than rehash its own predicament, it’s time to look at two more extreme value cases.
FDM, FTW?
Ask a consultant for the time and they’ll ask to borrow your watch, tell you, and then keep the watch. Or so the joke goes. For the blue-sky thinkers and change agents at FDM (FDM), there’s been little to laugh about since the outlook for the IT and business consulting group began its precipitous nosedive in 2023.
Ask FDM’s investors for the time, and they may no longer recall the start of the slide. But return to the wild distortions of late 2021, when customer spending was ballooning and markets were chasing any equity story with a pulse, and FDM’s share price of £13 (more than 10 times today’s level) translated to a forward free cash flow yield of 2.5 per cent. Hindsight or not, that was a hugely inappropriate valuation for a cyclical business.
Expectations needed only to dip slightly for sentiment to sour. So when that outlook started to truly head south in 2023, the sell-off was magnified. FDM shares are now down by ever-greater amounts over three, six, 12, 24, 36 and 48-month windows. As Deutsche analyst Tintin Stormont commented after last month’s interim results, shareholders are “in the third year of a stark correction”. Ouch.
Should price levels matter? Technical analysis, at least to this amateur, can look like pseudoscience. Yet when sentiment is at its extremes – be it bombed out or excessive – then a new story can struggle to form.
But let’s consider the facts. At the half-year mark, the board was confident enough in the company’s balance sheet and cash generation to declare a 6p-a-share interim dividend. That was a cut of 40 per cent, but its maintenance highlights FDM’s ability to flexibly adapt a cost base to subdued client demand, and to soften the hit to adjusted group margins by reducing consultant placements by 37 per cent.
Although its customers are sitting on their hands, unsure of which projects to commit to, demand won’t fall forever. US consulting behemoth Accenture (US:ACN) managed to secure $10.5bn-worth of consulting bookings in just the second quarter of 2025, showing there’s still a market. FDM hasn’t turned the corner yet (its shares wouldn’t be on the floor if it had), but it has options, cash and time. A rebound is still possible.
Bargains & More?
It’s one of the imponderables of the UK’s retail sector. Why, in a decade in which the value of 3i (III) jewel in the crown Action Group grew from less than £1bn to more than £30bn, has B&M European Value (BME) seen its market capitalisation slide from £3.2bn to £2.4bn?
After all, the parallels are hard to miss. The cheery, pile-it-high volume discounting, confidence to eschew online channels, and economies of scale make both well-positioned to serve cost-of-living-challenged European consumers. However, in the eyes of the market, only one group has delivered on its rollout mandate.
One argument is that Action benefits from its private ownership, and a valuation based on an assumed multiple of an adjusted profit figure.
Be that as it may, its strategy and execution has clearly been streaks ahead. Its proposition, pace and breadth of growth, EU-wide efficiencies and brand recognition, and consistency of ownership and management have pushed annual Ebitda to €2.4bn (£2bn) and counting. B&M’s own Ebitda, meanwhile, is expected to hit £870mn this year, broadly level with 2021’s high, despite a 20 per cent store expansion.
Like FDM, the discounter will probably never again feel a tailwind like the pandemic, when its out-of-town warehouses were given an unprecedented opportunity to cement its profile with customers.
But the explanation for B&M’s 60 per cent discount to a 2023 share price high – and 85 per cent discount to the place they’d be if investors adopted 3i’s equivalent multiple for Action – partly lies in what now look like historical events, and the subdued momentum that followed the exit of founder-chief executive Simon Arora and his brothers, who departed in a whirlwind of special dividends and share sales.
Arora’s successor, Alex Russo, left in April after a second profit warning, leaving Tjeerd Jegen to take the reins. Since his appointment, the Dutchman has bought more than £500,000-worth of shares, and overseen a pick-up in like-for-like sales in his first quarter.
Whether these are the first embers of a turnaround is impossible to say. A doggedly competitive UK supermarket sector also raises the stakes for a business whose retail proposition is to double as the weekly shop. The ever-present risk is that investors see B&M as another generic grab-bag poundstore, a comparison made clearer by its rising debt servicing costs in recent years.
Nothing is inevitable. Retail may be a tough game, but B&M knows its market and has the capacity to grow steadily. Three more solid quarters, and that capitulation rating may have vanished.
