viewBurberry Group PLC

The good and the bad at Burberry as the luxury fashion retailer overhauls its business

Foreign exchange benefits and an "exceptional" performance in the UK at Burberry have been offset by continued struggles in the US

Burberry has seen improved sales in China

Burberrry Group PLC (LON:BRBY) has been undergoing a major overhaul of its business amid struggles in the luxury fashion market.

In a trading statement today, the trenchcoat maker said it had made progress in its restructuring efforts but total revenue in the second half fell 1% on an underlying basis to £1.7bn.

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“In an uncertain environment, we continue to take action to strengthen the brand and reposition Burberry for growth,” said chief executive Christopher Bailey.

“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.”

Restructuring and management shake-up...

Burberry today said it was on track to deliver planned cost savings of £20mln in fiscal year 2017, which would increase to at least £100mln a year in full-year 2019.

The group announced its restructuring at its full year results last May when it revealed cost cutting measures to reduce complexity, simplify processes and eliminate duplication.

At the time the company also said it would invest £10mln to improve its retail and digital offering.

In January Marco Gobbetti joined Burberry as its new chief executive, replacing Christopher Bailey. Gobbetti was chief executive and chairman of fashion and accessories brand Céline, owned by LVMH Moët Hennessy Louis Vuitton.

The company has also poached Julie Brown from medical supplies group Smith & Nephew (LON:SN.) as its chief operating officer and chief financial officer.

Tough US market...

Burberry reported a “mid single-digit” decline in second half retail sales in its Americas division as its US business continued to struggle.

While a stronger dollar encouraged US customers to spend more abroad, demand at home suffered.

The US, a source of more than a quarter of group revenue, has also been affected by steep markdowns in the clothing sector.

Burberry said strategic actions taken to protect its brand positioning in the “highly promotional” US market contributed to the decline in sales in the second half.

Wholesale and licensing sales fall...

Wholesale revenue in the second half edged down 13% to £327mln. Burberry blamed a 20% underlying fall in revenue in beauty, affected by a “rationalisation” of distribution in key markets.

In an effort to turn around the beauty business, Burberry earlier this month announced a licensing deal with Coty Inc (NYSE:COTY) whose beauty brands include Calvin Klein, Chloe and Rimmel.

As part of the £180mln deal, Burberry will hand over control of its fragrances and cosmetics arm, including the manufacturing and distribution of its beauty range.

Meanwhile, licensing revenue tanked 28% to £12mln in the second half due to the planned expiry of Japanese licenses as the group moves to a direct retail operation.

Luxury fashion market challenges...

Luxury fashion sales slowed last year, in part due to slowing growth of China’s economy and crackdown on graft and extravagant gift-giving in the nation.

However, industry data has been improving since the middle of 2016 as trends in Greater China and Europe recover.

For Burberry, sales in China achieved “high single-digit” percentage growth during the second half. The pick-up in China offset a decline in Hong Kong, which was hit by a drop in the number of shoppers, and a slump in South Korea, affected by a weak economy and reduced promotional activity.

Foreign exchange benefits...

Burberry has been buoyed by a weaker pound following the Brexit vote last June as it makes most of its revenue outside the UK.

Including foreign exchange benefits, the company’s total revenue jumped 14% in the second half.

The group expects a positive impact of £130mln on its reported full year 2017 profit based on rates at 31 March. This compares to a foreign exchange benefit of £115mln at 31 December.

However, the pound rallied after Prime Minister Theresa May called for a snap general election on 8 June. Analysts are concerned that should the pound continue to strengthen in the lead up to polling day, Burberry’s results could suffer.

“Exceptional” UK performance

A slump in the sterling has attracted tourists to Burberry's high-end fashion chains in the UK.

Burberry said it achieved an “exceptional” performance in the UK in the second quarter, boosting its Europe, Middle East, India and Africa division.

Growth in sales of leather goods was a key driver of the results and the company said it has had a positive reaction to its February collection and its and its commercial extensions.

Confident outlook...

Burberry kept its forecast for full year adjusted pre-tax profit unchanged in today's trading update. The following year the group sees a pick-up in wholesale and licensing revenue on the back of its restructuring efforts.

In a sign of confidence for Burberry’s prospects, it emerged earlier this year that Belgium’s richest man was investing in the business. Albert Frere, worth an estimated £3.9bn, has taken a 3% interest in Burberry via his Groupe Bruxelles Lambert (GBL) investment vehicle. Shares had jumped as much as 5.9% on the news.

Quick facts: Burberry Group PLC

Price: 2120 GBX

Market: LSE
Market Cap: £8.65 billion

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