By  on January 18, 2018

LONDON — Burberry had a lot to say Wednesday about pre-Christmas trading, its plans to go big on handbags and its new strategy of selling top-to-toe looks, but there was one particular question that was burning on the lips of financial analysts, a question that Burberry couldn't answer: Who will replace Christopher Bailey?Burberry’s chief creative officer and erstwhile chief executive officer, Bailey will show his final collection in February during London Fashion Week and step down from the board in March, although he plans to work with the brand until the end of the year. The new ceo, Marco Gobbetti, has already begun looking for Bailey's successor, although that could take a while and he's not planning to comment on speculation in the meantime.During a call on Wednesday to discuss a 2.2 percent dip in third-quarter retail sales to 719 million pounds, Burberry’s chief operating officer and chief financial officer Julie Brown said the company was “making good progress” with the search, and reiterated that Bailey would remain at the company “for the rest of the year.”Her words did little to curb the curiosity — and impatience — of analysts, who’d like Gobbetti to make a decision so that Burberry can focus on sales growth, and bolstering its stock price.The trading update rattled the markets, with Burberry’s share price falling 7.2 percent to 16.56 pounds in late morning trading, and closing down 9.3 percent at 16.19 pounds."Past successful turnaround stories in luxury are often associated with a strong creative director working in partnership with the ceo, so the vacuum in creative direction at Burberry is clearly unhelpful for the stock, especially considering the potential long wait for an external hire. Non-compete agreements for a top name can be as long as one year," Rogerio Fujimori of Royal Bank of Canada said in an interview over e-mail. "Change in creative directors can also bring disruption during the transition phase, and this is the near-term fear with the imminent departure of Christopher Bailey."While Fujimori added that Gobbetti must take his time to find a suitable creative director, "the longer it takes to find the right person, the longer it will take for the new creative director to introduce his new vision and product identity, and for Burberry to reposition the product offer with more fashion content."Other analysts took a similar view. “The appointment of a worthy successor to Christopher Bailey who is capable of writing a new chapter for Burberry will be key for the midterm investment opportunity,” said Luca Solca in a report immediately following Wednesday’s third-quarter numbers.Solca pointed out that even in an ideal world, Burberry’s turnaround will take time. “Even if Gobbetti was as fast and as successful as [Gucci’s ceo] Marco Bizzarri — a big if — one would need to wait 18 months from the moment a new designer is appointed to the moment organic growth starts to kick in.”Barclays’ Julian Easthope and Julie Zhuang echoed the sentiment: “The key issue remains the new creative director, [and] the group pointed out that it plans to take the best person, regardless of timing.”Gobbetti won’t be rushed on such a big decision. He has said he wants Bailey’s replacement to stay for at least a decade and to lay down a new luxury template for the brand. Market speculation about a successor has ranged from Phoebe Philo to Kim Jones (if he doesn’t go to Versace) to Riccardo Tisci, Alber Elbaz, Tomas Maier and Stuart Vevers.In December, Philo left her job as designer of Céline, where she used to work with Gobbetti. Although it is understood Philo has no plans to work for another label in the near future, she is likely subject to a non-compete with Céline's owner LVMH Moët Hennessy Louis Vuitton, which could take a year to expire.Jones who, as reported, is set to exit Louis Vuitton after showing his fall collection on Thursday, likely finds himself in a similar situation with the non-compete. It also remains unclear how far down the road he is with any Versace negotiations. Versace has declined to comment on whether Jones will join the company.Whomever Gobbetti chooses will need nerves of steel in addition to talent: In November, Gobbetti had already warned the markets of a slow start to his five-year strategic plan, telling investors that sales and adjusted operating margin would be flat as the company reshapes itself for the future.Nine weeks into the new strategy, the company reported the 2.2 percent dip in retail sales, with sales growing 1 percent on an underlying basis.Comparable-store sales rose 2 percent in the three months to Dec. 31, compared with 3 percent in the corresponding period last year, and fell short of some analysts’ expectations. According to UBS, market consensus had recently been “nudging up to 4 percent like-for-like,” following strong reporting from Burberry's peers.The lackluster results were due to the waning impact of the weaker, post-referendum pound in the U.K., Burberry’s base and one of its most important markets. In the corresponding period last year, retail sales in the U.K. rose 40 percent, boosted by bargain-hungry tourists flooding into shops after watching the pound fall.Other headwinds took their toll in the period: Chinese demand slowed year-over-year, while Burberry deliberately reduced promotional activity in mainland China, part of Gobbetti's bigger, worldwide strategy to cement the brand in the luxury space. Demand remains strong, however: Burberry pointed out that so far this year, like-for-like growth in mainland China is 10 percent.Asia-Pacific and mainland China both delivered midsingle-digit percentage growth in the three months, while Hong Kong was flat and South Korea saw a slight decline in sales. The Americas saw low-single-digit percentage growth, due to deliberate moves on the part of the company to polish and upgrade its wholesale network.“We are making good progress embedding our strategic vision into the organization and remain on track to meet our full-year profit target,” Gobbetti said as he announced the third-quarter figures. “We are building on strong foundations and are fully focused on the successful delivery of our multiyear plan to position Burberry firmly in luxury and deliver long-term sustainable value."Brown also pointed to a third reason for the decline in retail sales growth: product mix. As part of the new strategy, Burberry has been encouraging its customers to buy “top-to-toe” looks and putting a new emphasis on trousers, skirts, tops and knits, the price points of which are lower on average than trenches and other outerwear, which have long been a mainstay of sales.Burberry has also been looking to woo more customers with entry-price products — such as small accessories and jewelry — and emphasized that fashion outperformed in the third quarter, with customers responding positively to new products across categories.Brown said the brand also plans to make a bigger push into accessories, with a host of bags and leather goods in a variety of sizes and styles set to bow in the spring.Full-year guidance for operating profit remained unchanged for fiscal 2017-18, which ends March 31.Some analysts were sanguine about Wednesday's results. Barclays said Burberry was taking "short-term pain for long-term gain," while Pia Ostermann, beauty and fashion analyst at Euromonitor International, said Gobbetti's vision is focused on long-term benefits rather than an immediate impact."With the new strategy implemented, plus a strong outlook for luxury goods in the U.K. (expected to reach 9 percent compound annual growth rate until 2022) and the continued influx of tourists from Asia and Western Europe, Burberry’s growth prospects remain as the stalwart of iconic British luxury,” she said.Gobbetti said in November that his overall aim is to reverse the trend of slower growth compared with Burberry’s luxury peers, and over the next five years he is looking to achieve “high-single-digit” revenue growth — higher than the 4 to 5 percent that Bain has projected for the sector in the medium-term — and “meaningful” operating margin expansion.

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