Stock of the week: People Power

When the CEO of Burberry, Marco Gobbetti, announced his resignation early last week, the share price of the British luxury retailer fell by a whopping 10%. This led us to muse on the impact that CEO’s can have on a share price, especially when it comes to changes at the top of listed companies.

Personality traits impact the bottom line

We all know that the CEO is an important role at any company and they obviously impact the share price, but did you know that the personality type of a CEO can also have a big baring on investor confidence and ultimately on share price performance. The Harvard Business review reported in 2019 on a study of 3,000 CEOs in the S&P 1500, analysed between 1993 and 2015, the study found that conscientious CEOs tended to have low levels of stock price volatility and higher stock returns at increasing levels of risk compared with their more neurotic and extrovert counterparts.

Overall, it found that conscientious and more emotionally stable CEOs were able to generate better stock market returns. They experienced a 2.59% lower stock risk, and increasing risk resulted in a 3.83% increase in returns for their firms. This compares with less contentious CEOs who found that increasing levels of risk decreased their returns by 1.7%, and more neurotic CEOs caused the risk levels associated with their stocks to rise by 2.04% relative to their emotionally stable counterparts. This could go some way to explain Elon Musk’s impact on the Tesla share price. This analysis reported by the HBR in 2019, highlights just how important a CEO is to a company’s share price when every percentage point matters. It also highlights why traders and investors need to understand the people behind the C-suite since their personalities can also impact on stock market returns.

What Gobbetti’s departure from Burberry means for the long term

Another key driver of stock market returns is a change in CEO, the resignation of the top dog at any company can cause havoc with a company’s share price. Gobbetti’s departure from Burberry came as a massive shock to financial markets.

Firstly, because he only joined the company in 2017 and supposedly had a 5-year plan to turn Burberry’s fortunes around. Secondly, although he is not leaving Burberry until the end of the year and he does not appear to have been ousted, he is leaving to run the smaller luxury shoemaker Salvatore Ferragamo. We live in unusual times, and apparently Gobbetti’s decision was also driven by a desire to spend more time with his family in Italy, something he has not been able to do while working in London during the pandemic.

So, what does the future hold for Burberry? We would note that its share price has not recovered after last week’s sell off, but could there be further downside to come? Below we take a look at both sides of the argument in more detail.

The case for further Burberry downside:

• We still don’t know who the successor will be. Analysis suggests that a highly paid outsider can boost a stock price, so we will be watching closely for any announcements about who will succeed Gobbetti.
   
• The creative designer is a key role at any luxury fashion house. So far, Burberry’s CD, Riccardo Tisci, is staying put. However, he came with Gobbetti, so we cannot rule out that he will also resign. If this happens then we would expect another sharp decline in Burberry’s share price, since his creative vision has been a key driver of turning Burberry’s fortunes around in recent years. If Tisci stays put, then the new CEO better get on with him, otherwise there could be plenty more volatility for Burberry’s share price to come.
   
• These are tricky times, and the prospect of a third wave of Covid could mean that investors are cautious about the outlook for luxury goods as a whole. If the latest wave of Covid escalates further over the summer months’ then we would expect Burberry to be one of the weakest performers in the luxury sector.

Reasons to be optimistic about Burberry’s future

• People come and go, and Gobbetti is leaving Burberry in relatively good shape. While Burberry’s share price tanked at the peak of the pandemic, the share price has climbed 15% so far in 2021 and it has risen nearly 40% since October last year.
   
• Gobbetti has set the aim of achieving high single figure growth between now and the end of the year, which could help the stock market to recover.
   
• Some retail analysts think that Gobbetti’s 5-year plan and overall strategy for the firm has been working well, even through a global pandemic, for example, operating margins actually grew in Q1 2021 compared with Q1 2020. Thus, the firm may hire someone internally who has been working with Gobbetti in recent years. Although he may not be at the reigns after the end of this year, Gobbetti’s vision for Burberry could live on.
   
• Burberry also restored its dividend for the year to the end of March to 42.5p, which is the same as 2019 levels. Thus, the recent decline in the share price could be seen as a good buying opportunity.

Overall, while we think that the shares have had a good run over the last 9 months, Gobbetti’s plan should be carried out in full regardless of who is at the helm of Burberry and we could see some bargain hunters pick up this stock in the near term. However, if Riccardo Tisci announces his resignation any time soon then we could see another sharp sell-off, so make sure you keep up to date with the latest trends when it comes to Burberry.

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