Burberry sees global ups and downs, bags boom but beauty dives
Burberry delivered a mix trading update on Wednesday morning. There were signs that the firm is getting back on the recovery trail as its its new bags and outerwear are selling well, but also that there is clearly still work to do.
And it looks like jobs could go as the firm’s high-profile outsourcing of its beauty operations to Coty means several hundred positions in that division are at-risk. Although the company has not officially commented on this, reports suggested that consultations on job losses are already under way.
The positives in the second half, the six months to March 31, included underlying retail sales rises and Chinese growth back on track. But total revenue still dipped 1% on an underlying basis and Q4 comparable sales growth slowed to 2% from 3% in Q3.
Let’s look at the headline figures first. As mentioned, total revenue of £1.607bn was down 1% underlying, although it was up 14% at actual exchange rates as the weakness of the pound continued to work in Burberry’s favour.
Much more encouraging was the retail revenue figure of £1.268bn that was up 3% on an underlying basis, or up 19% due to currency exchange effects. The figure rose as Asia Pacific retail revenues grew, driven by strength in China, while EMEIA saw double-digit growth, led by an “exceptional performance in the UK”.
The strength of the accessories category also helped the retail figures to move upwards, with a mid-teens percentage growth in leathergoods as the brand has continued to unveil new additions to its bag line-up. And fashion “outperformed” with innovation in outerwear, including the launch of Burberry’s tropical gabardine, also adding to retail takings.
But wholesale revenue of £327m was down 13% on an underlying basis (or down 1% in total), with over half the decline coming from the rationalisation of Burberry’s distribution in key markets and distributor de-stocking in beauty.
The beauty category has been an under-performer for the company for a while and revenue here declined about about 20% underlying, despite success in fragrance. Yet with Burberry recently announcing its major link-up with Coty that’s due to start this autumn, expectations are high that the future story will be all about growth.
Licensing revenue of £12m was also down, by 38% underlying, primarily reflecting the planned expiry of its Japanese licences.
Of course, what many people really want to know is how successful the see now, buy now fashion shows have been. Without giving actual figures, Burberry said that the February show and collection generated “record online reach and engagement” and a “strong commercial reaction” with accessories and outerwear both performing well.
REGIONAL UPS AND DOWNS
For any global brand, the sales picture at present is likely to be patchy around the world and Burberry is no different from its luxury peers on this front. Europe is proving to be a stronger market. The EMEIA region’s double-digit comparable sales growth came as the UK powered ahead on the back of a tourist boom due to those currency effects. And France also improved during the half.
China, as mentioned, is back as a growth market too, its high single-digit comparable sales growth helping Asia Pacific overall to low single-digit growth and the good performance accelerating as the half wore on.
But there are still problem markets in the region. Hong Kong declined as negative footfall was only partially offset by improved conversion, and South Korea, its third largest market in Asia, declined, impacted by both the macro environment and the firm’s own actions to cut promotional activity.
The company also saw a mid single-digit percentage decline in the Americas. The relative strength of the US dollar meant US customers shopped abroad in large numbers, but demand at home was down (both from domestic customers and tourists). Burberry also said that strategic actions taken to protect brand positioning in the highly promotional US environment, contributed to the decline - which means the brand refused to discount its products in a market where consumers are used to markdowns.
But while Middle eastern markets being challenging added to regional woes, that 3% underlying retail revenues rise means that the overall sales picture was a positive one. And with retail now representing 80% of total revenues compared to 70% three years ago, its continuing growth must be encouraging.
Not that it’s the fastest growing area of the firm’s business. Good digital growth reflected Burberry’s strategic focus and investment intros area and with strong traffic and improved conversion, mobile delivered the majority of the rise, up an impressive 50% year-on-year. The enhanced local website in China delivered positive results with a near doubling of direct to consumer sales.
WHERE DO WE GO FROM HERE?
So, as we said, a patchy second half report and clearly a work-in-progress. The company is maintaining its forecast for adjusted pre-tax profit and is continuing to invest to counteract any negativity. However, conditions are obviously still challenging and it is unclear how long the currency boost from the weak pound will last.
The pound rose on Tuesday after the UK’s prime minister announced a general election so it will be interesting to see whether global consumer enthusiasm for London as a ‘cheap’ shopping destination starts to tail off.
Creative chief Christopher Bailey, who is still CEO for now while future CEO Marco Gobbetti gets to know the business, was upbeat but cautious. He said: "In an uncertain environment, we continue to take action to strengthen the brand and reposition Burberry for growth. The outperformance of fashion and the strong customer response to new products underline our renewed creative momentum. While we have more to do, as we build on our progress so far, we remain confident about Burberry's prospects in the longer term."
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