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Burberry shares plunge as it unveils new strategy and reveals slowdown in UK sales

Burberry said it is mindful of the tougher comparative revenue base in the second half”.
Burberry
Burberry is moving further upmarket

Burberry Group PLC (LON:BRBY) shares slumped as it reported a slowdown in UK sales in the second quarter and unveiled its new strategy to transform the business amid a tough retail market.

In a strategy update, the luxury fashion retailer announced plans to deliver further cost savings by simplifying its product ranges and closing down non-performing stores. The closures will mainly affect the wholesale arm and will initially focus on the US and Europe.

READ: Burberry reveals surprise departure of Christopher Bailey, its chief creative officer and previous CEO

Marco Gobbetti, who succeeded Christopher Bailey as chief executive in July, said the group would move even further upmarket and establish itself “firmly in luxury” in an effort to improve margins. 

"Now is the right time for Burberry to implement the next phase of its transformation," he said.

"By re-energising our product and customer experience to establish our position firmly in luxury, we will play in the most rewarding, enduring segment of the market. We have the foundations to build on and the team to execute our plans. This will enable us to drive sustainable growth and higher margins over time, whilst continuing to deliver attractive returns to shareholders."

READ: Burberry “one of the most exciting restructuring stories in the luxury goods sector”

As the company undergoes its restructuring, it expects revenue and adjusted operating margin to be “broadly stable” year-on-year at constant exchange rates in fiscal years 2019 and 2020.

The group anticipates the transformation programme will achieve cost savings of £100mln in 2019 and £120mln in 2020. Cost savings will offset by restructuring charges of £15mln in 2019 and an estimated capital expenditure of £130mln to £160mln per year.

Further afield, revenue and adjusted operating profit are expected to grow in 2021 while capital expenditure will rise to £190mln-£210mln. Adjusted earnings per share is expected to grow ahead of adjusted operating profit. 

The strategy update was released alongside Burberry’s first half results, which revealed double-digit underlying profit growth on the back of £20mln of incremental cost savings, offset by £32.9mln in restructuring costs.

Underlying profits and revenues rise 

Adjusted operating profit rose an annualised 17% on an underlying basis, excluding foreign exchange benefits, to £185mln in the six months to 30 September.

Underlying revenue climbed 4% to £1.2bn while comparable-store sales increased 4%, picking up from a flat performance in the year-ago period.

“Consumers responded positively to fashion and newness, particularly in rainwear and leather goods,” said chief executive Marco Gobbetti.

“Digital revenue grew in all regions, led by mobile, while growth was strongest in our own stores in Asia Pacific.”

UK tourism spend slows

The Asia Pacific region delivered a mid-single digit percentage rise, supported by a mid-teens percentage increase in Mainland China and a return to growth in Hong Kong in the second quarter. However, Korea continued to decline amid a challenging economic environment.

In the Europe, the Middle East and Africa region, the company saw mid-single digit percentage growth, albeit a “slight deceleration” in the UK in the second quarter.

UK sales slowed in the second quarter as tourist spend weakened. A drop in the value of the pound had been attracting tourists to its UK stores but the annualisation of sterling weakness saw less overseas shoppers spending in the second quarter.  

In Continental Europe, Italy remained soft while France and Germany improved in the second quarter. The Middle East “remained challenging”, due to a difficult macro environment, the company said. 

Burberry lifts dividend, upgrades profit forecast

Burberry lifted its interim dividend by 5% to 11p as free cash flow rose to £171mln from £75mln last year.

Net cash stood at £654mln on September 30, compared to £529mln the same time last year and £809mln at 31 March 2017, reflecting £123mln of dividend payments and £191mln of share buybacks.

A total of £350mln share buybacks will be completed in fiscal year 2018, the company said.

For 2018, Burberry has given a marginal upgrade to its estimates for adjusted operating profit at constant exchange rates and expects £60m of cumulative cost savings.

However, it warned that it was “mindful of the tougher comparative revenue base in the second half”.

Shares fell 9.67% to 1,793p in early trading.

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