Burberry Group PLC (LON:BRBY) may have pleased investors with its first quarter revenue growth but the luxury fashion retailer’s new boss has warned that he is “mindful of the work still to do”.
Shares in the trench coat maker rose 2.34% to 1,617.0p in late morning trading as the FTSE 100-listed company reported a better-than-expected increase in sales.
Underlying retail revenue in the three months to 30 June rose 3% to £478mln, while like-for-like sales climbed 4%, driven by increased spending by Chinese consumers and a strong performance in the UK.
Analysts on average had been expecting a 2.3% gain in like-for-like sales.
Burberry’s leather goods were among the best selling items during the period, bolstered by its DK88 handbag, which sells for as much as £2,495 each.
Ken Odeluga, senior market analyst at City Index, said the results showed an unexpectedly solid advance in comparable sales growth and the “most promising underlying trend in China for at least three years".
Burberry's overhaul still a way off
But Odeluga noted that new chief executive Marco Gobetti, who replaced Christopher Bailey on 5 July, had stated Burberry still had work to do in its overhaul of the business.
As part of its restructuring, Burberry is on track to deliver cost savings of £50mln by fiscal year 2018 and to begin operating a new business services centre in Leeds in October.
The company plans to move about 300 roles to Leeds from London to reduce office space requirements in the big smoke and save money.
Burberry scraps plans for Leeds factory
However, plans for a £50mln factory at a former flax mill in Leeds have been ditched, a year after it suspended the project in the wake of the Brexit vote.
The facility was due to open in 2019 and would have created 200 jobs but Burberry said today after the release of its trading update that it had relinquished its option on the building.
“Because it’s such a major decision for Burberry with a great deal of investment involved, we decided to take our time,” said finance director Julie Brown.
Brown added that Burberry may still open UK factories in future and that Brexit was not the only reason for giving up on the site.
Weak pound draws in UK tourism while strong dollar sends US consumers overseas
While a weaker Brexit-driven pound has drawn in overseas spenders to Burberry’s UK stores, the company said it experienced a decrease in like-for-like sales towards the end of the first quarter.
The group also reported weakness in some areas in Continental Europe, including Italy, and a slowdown in US sales.
A stronger dollar saw US consumers do more of their spending overseas, leading to a “low single-digit percentage decline” in same-store sales in the Americas.
Steve Clayton, fund manager of Hargreaves Lansdown Select UK Growth Shares fund, said: “The strength of the dollar means that US luxury consumers are spending less at home, but more overseas, showing that the rich are canny too.”
Clayton thinks it was an overall “encouraging performance” from Burberry and believes the brand still has plenty of growth potential, as demonstrated with the success of its DK88 handbag.
Near-term growth at Burberry could be held back, analyst warns
Clayton noted Burberry’s remarks that there would be “no material contribution from net new space” in the retail division in fiscal year 2018 and its plans for “brand control” in the wholesale channel later this year to improve its image and positioning.
“That will hold reported growth back a bit in the near term,” Clayton warned.
“But with an acceleration in new product launches set for the second half of the year, the underlying progress at Burberry should improve steadily.”
Luxury fashion sector faces risks, UBS says
UBS warned that Burberry faces a number of risks in the luxury goods sector. The bank said external factors, such as terrorism, may impact consumption.
Other risks to the industry include drastic political changes, pricing pressures, brand value, management execution and successor issues, perception in the equity market about long term growth and foreign exchange rates.
Burberry under pressure over executive pay
Meanwhile, Burberry has also been under pressure over executive pay. Last month Brown waived up to £2.4mln of the remuneration package she had agreed a year ago after advisory group ISS recommended that shareholders vote against it at the annual meeting on Thursday.
Brown also agreed to a pay cut after it emerged that shares she had been given on joining Burberry were worth more than she was to receive from her former employer, Smith & Nephew. The shares were granted under a performance-related scheme that the Burberry award was intended to replace.
In 2014, more than half of investors voted against its remuneration report that had recommended a pay rise for Bailey to prevent the former boss from taking a job at a rival designer.