Transitional year for Burberry sees mixed results, bags outperform
Burberry was talking up its successes on Thursday morning as it reported results for the year to March 31. Christopher Bailey, who is soon to hand over the chief executive’s reins to Marco Gobbetti, talked about “encouraging early success with key revenue drivers” as “newness and innovation outperformed,” and the firm saw mid-teens growth in bags.
He also mentioned “improved mainline retail conversion and retention,” as well as “e-commerce leadership [and] growth in digital” and the company getting regulatory approval for its plan to outsource its struggling beauty ops to Coty.
But the news that the financial press will pounce on was a bit less positive, although the negative elements were perfectly understandable, given the conditions for the luxury sector in the past year, and the fact Burberry has been investing heavily in its brand to position itself for future growth.
Revenue may have risen 10% on a reported basis but it fell 2% to £2.8bn underlying when the benefit of currency effects was factored-out. And while adjusted profit before tax was up by £42m to £462m in line with guidance, it was down 21% on an underlying basis, in part “due to taking strategic actions to elevate the brand”. Reported pre-tax profit fell to £395m from £416m.
To keep shareholders happy, the full-year dividend of 38.9p was up 5%. Did it have the desired effect? Well its shares edged up almost 2% in early trading and were still rising as we published this report.
The way Burberry has been “elevating” and reshaping itself showed through clearly in the revenue figures. Retail revenue rose to £2.127bn from £1.837bn, mainly as it opened more space but the change in the mix became clear too. Retail represented 77% of total revenue, up from 73% a year ago and up 3% underlying, with comparable sales up 1%. The good news on comp sales was that while H1 was flat, H2 was up 3%, so the environment is clearly improving.
Christopher Bailey said that “[fiscal] 2017 was a year of transition for Burberry in a fast changing luxury market. The actions we have taken to lay the foundations for future growth are yielding early benefits and I remain confident that these will build over time. Marco Gobbetti assumes the role of CEO from July. With his extensive experience in the sector, we will build on these foundations to elevate and strengthen the brand further and take Burberry to the next level as a global luxury retail and digital business."
Gobbetti certainly has his work cut out for him. Burberry said the external environment remained challenging in the past year, particularly in the US and Hong Kong and while “newness led growth, and accessories outperformed… apparel saw softer trends.”
Focusing on key product categories, simplifying the product offer while increasing innovation, tailoring the offer more effectively for local needs and implementing a new approach to managing product categories helped it win through though. And it completed the rollout of its ‘one label’ strategy as it dropped labels like Prorsum, London and Brit and just relied on the Burberry name.
Part of the process linked to this focus on one label meant it reduced SKUs by around15%-20% “to provide greater visibility of fashion and newness”. This also included evolving its handbag offering “around a new pillar and shape strategy” with the result that leathergoods outperformed, and bags, as mentioned, rose in the mid-teens at retail.
Burberry also said that it saw a “positive customer response to direct-to-consumer runway collections and their commercial extensions.” This meant “fashion outperformed, supported by innovation in core categories, such as the successful launch of lightweight tropical gabardine, with a strong pipeline of launches to come.”
The company has also been improving its end-to-end retail disciplines “to drive retail productivity through a multi-year programme focusing on improving service and customer cultivation, product and operations.” Has it worked? Well, Burberry said it has seen increased conversion and improved customer retention, and has invested further in globally consistent training, focusing on customer service. And there has been an over-50% increase in the Burberry Private Client team, ahead of its target of 20%.
On the digital front, e-commerce sales were its fastest growing channel and it said around 70% of customers' buying decisions were influenced by digital. It launched a redesigned website for desktop and mobile and a localised site in China as well as soft-launching a Burberry customer app in the UK
REGIONAL STRENGTH… AND WEAKNESS
The launch of that Chinese website demonstrated just how important Asia Is a whole is to the firm. Burberry said Thursday said that with retail accounting for almost 90% of revenue in the region, comp sales were broadly flat but it saw an improved performance in the second half. Mainland China delivered high single-digit percentage growth, accelerating through the year to deliver double-digit percentage growth in Q4.
Hong Kong improved through the period although remained negative for the full year, impacted by lower footfall that was partially offset by improved conversion. And Korea, its third largest market in Asia, was impacted by both the macro environment and its own actions to reduce promotional activity.
In its Europe, Middle east and India region, retail accounted for 70% of revenue and comp sales increased by a high single-digit percentage, with an improvement to double-digit percentage growth in the second half.
Both local customers and tourists contributed to the positive trends and tourists were key to the UK delivering “an exceptional performance”. Continental Europe saw improvements in most markets through the year, particularly France, but the Middle East remained difficult, experiencing negative footfall trends.
But like a number of other companies, The Americas remained tough for the firm. With retail accounting for around 70% of regional revenue, comparable sales reduced by a low single-digit percentage. The relative strength of the US dollar drove a strong increase in sales from US customers abroad, while demand at home reduced. And it seems the company isn’t prepared to discount to boost that demand saying that “strategic actions were taken to protect brand positioning in the highly promotional US environment.”
WHOLESALE AND BEAUTY
Burberry said that wholesale fell to £614m from £635m in the latest year as the brand’s exit from some wholesale accounts continued. Its planned focus on owned retail rather than wholesale has seen the category declining for several year and and it accounted for 22% of revenue this time compared to 25% a year ago.
The wholesale revenue fall of 14% (underlying) was in line with guidance, but almost half of the decline came from Beauty. Reflecting the rationalisation of distribution in key markets, to improve the brand positioning, and “distributor de-stocking,” Beauty revenue declined by about 20% underlying to £171m. However, the My Burberry and Mr Burberry scents continued to gain share in key markets as emphasis was placed on building pillar fragrances.
Excluding Beauty, underlying wholesale revenue still declined, led by a “significant fall” in The Americas, “in part reflecting the firm’s strategy to reposition the brand in the US”.
So what does this all mean for the current year? The results report was short on detail here but did say that there is no change to its expectations for FY 2018 adjusted pre-tax profit at constant exchange rates. And those exchange rates are key, with the boost it got in the latest year from the weak pound set to reverse this time. An adverse impact of about £30m is expected.
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