Burberry reports a first half trading update on Wednesday, 12 October. We expect 29% constant currency sales growth to £820m, representing 2Q sales of £453m, or growth of 26% at constant currency compared with 34% in Q1. Within this mix we assume retail comp store sales growth of 13% and reported wholesale sales growth of 9%.

We expect continued gross margin gains through mix (retail, Asia) to offset raw material cost inflation and percentage margin dilution from performance of Prorsum and London and expanding categories such as shoes and kidswear. However, Burberry has previously highlighted that operating costs (including: flagships, customer service, share schemes and China retail costs as well as space related and inflation) in the current year will be first half weighted. As a result, we look for a 50bps 1H EBIT margin decline in the key retail/wholesale division with a modest 60bps increase in the FY.

Across the luxury space, comps become increasingly more challenging in 2H. We estimate +16% 2H organic wholesale/retail sales growth (retail comp stores +6%, wholesale reported +7%), which in part accounts for 2-year comp becoming substantially more difficult in 2H vs. 1H. We appreciate that part of this is owing to the transfer of China wholesale sales into retail last year with the acquisition of franchises.

Burberry’s strategy of reinvesting underlying gains to drive further growth is working with arguably some of the greatest gains to come following this year’s flagship, creative, service and digital investments. Given the recent pullback in the shares, the stock offers some upside to our 1,356p DCF/P/E multiple based price target.

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Despite cutting our 3Q11 estimates for the brokers and universal banks by 29% on average back on September 6th, we think 3Q11 has turned out to be tougher than we thought as asset prices continued to face pressure, the trading backdrop remained difficult, and expense flexibility is limited. Given this backdrop we are once again hitting estimates hard and now expect a breakeven quarter for GS and a small core operating loss at MS. Our 3Q11 estimate for GS is now $0.00, down from $1.00, and our estimate for MS goes to $0.25 from $0.31 (this estimate includes roughly $1 billion of positive DVA, so EPS ex DVA is about -$0.10). For the universal banks, our biggest cut is for JPM which goes to $0.90 from $1.16, as the tough trading backdrop has taken a bite out of capital markets revenue and litigation costs will remain elevated (we also reduced our estimates for C and BAC, to $0.75 and $0.15, respectively, from $0.84 and $0.18).

Despite a healthy pick-up in trading volumes in 3Q11, meaningfully wider credit spreads (both high grade and high yield widened by over 20% in the quarter) and significantly lower equity markets (S&P 500 -14%, MSCI-EAFE -20%) likely led to meaningful mark-to-market pain for the brokers and universal banks. In addition, investment banking trends remained soft across the board as the market backdrop likely pushed out the M&A and equity calendars. With recently announced expense initiatives still in early implementation, there is not much management teams can do to insulate the bottom line (but it will be interesting to see where comp shakes out).

Combined institutional commission and trading revenues performed well with double digit percentage growth year on year. This is the third successive year of increased revenue from this area.