Burberry Case Model Benchmarking
- 02:57
Benchmarking forecasts in a retail company model.
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Transcript
We're going to compare the key line items in our Burberry model to those of consensus just to see if we can get some steer on how sensible our forecasts are. We'll start off with revenue. Now our forecast revenues are well below consensus and they are increasingly conservative compared with consensus as we look across the forecast years. We will need to feel comfortable that we have some Edge on why we think revenues will grow more slowly than the rest of the market thinks. Because we're more bearish on a particular segment or even product line and if so, do we have research that supports this? Things start to get a bit more interesting. When we look at ebitda as we can see here. We're actually above consensus for the next two years and then we drop below consensus in the third forecast year. This means that our margins must be well above consensus for the first two forecast years to get this results given that our revenues were below consensus in those years. So it might encourage us to dig a little deeper into our margin assumptions in particular if we've identified what it is that causes our revenues to be below consensus. Is this narrative also reflected in our margin assumptions, for example, if our revenues are below consensus because we expect lower sales of higher margin products such as beauty products, then why is this not also reflected in lower margins and ebitdar if it's because we believe that the company will exceed expectations regarding tight cost control that might help to explain the trend for fy1 and fy2, but we then need to be clear on why this effect drops off in fy3. Now, let's have a look at the net income line. The trend here is similar to what we saw with ebitda. So as long as we're comfortable with our ebitda forecast, then we typically expect a similar trend here given that any discrepancies at this point would primarily be the result of differences in depreciation amortization net interest expense or tax rates. One thing to note here is that we've compared net income to consensus, but it's probably more common to compare EPS figures, but the results will be exactly the same. Now, let's have a look at capex. Our forecasts are well above consensus for capex and particularly in the second forecast year. Now remember that we forecast a large increase in investment in intangible assets in fy1 and fy2, and that's likely what's driving this. I think what is concerning here is that with those capex forecasts. We're still ending up with revenue forecasts, which are below consensus by fy3. This seems a little inconsistent. I've typically an increase in investment would be expected to drive up revenues in subsequent years. So you can see that we can use these consensus numbers to challenge our views and assumptions for the company. We're not saying that we're trying to make sure our numbers match consensus because obviously that's not going to help us generate investment ideas. But really is to make sure that there aren't any unexplained inconsistencies between our forecasts and consensus.