Lagging behind for the wrong reasons Whilst all luxury stocks share prices are now above their pre-Covid 19 levels, Burberry is still 8% below its Jan 2020 peak of 2,329p. The stock is trading on 21.3x CY 2022 PER, a c30% discount to peers. We believe the discount in valuation is currently pricing in that Burberry (i) will take much longer to recover from Covid-19 than peers and/or (ii) is structurally a weaker brand. We disagree on both assumptions and find sell side and investor sentiment too bearish. Notably, the market has focused on short-term negative impact of Burberry''s conscious decision to reduce markdown to its topline rather than the long-term positive impact to its brand image and gross margin. Current transformation not priced in Since Covid-19 started, apart from Q3 ending Dec 2020 due to the above-mentioned markdown reduction, Burberry has posted better-than-expected sales. From a gross margin and EBIT margin standpoint, positive surprises in H1 and H2 have been significant, leading to continuous consensus estimates upgrades. On 13th May 2021, Burberry reported (i) Retail comps for Q4 ending March 2021 only 5% below 2019 levels overall and 12% above in terms of full price sales, and (ii) a FY March 21 EBIT margin of 16.9%, 50bp higher than in FY March 20. True, best-in-class companies LVMH, Hermes and Richemont have done much better. But Burberry''s top line performance puts the company in what we would consider the luxury''s ''division 2'' with Kering, Prada and Brunello Cucinelli, and comfortably ahead of ''division 3'' (Swatch, Ferragamo, Tod''s, Hugo Boss and Moncler). In our view, in spite of Covid-19, Burberry''s strategic transformation is on track and we believe its medium-term objectives to grow revenues at a high single digit CAGR and reach an EBIT margin of at least 20% are realistic. Yet we think this is not priced-in in the current valuation as our FY March22-24e EBIT margin forecasts are c.100bps above...