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LONDON — In what could be a harbinger of tougher times ahead for the luxury sector, Burberry Group plc reported a slowdown in sales growth for the first quarter, citing “a more challenging external environment.”
This story first appeared in the July 12, 2012 issue of WWD. Subscribe Today.
On Wednesday, Burberry shares closed down 7.4 percent to 11.89 pounds, or $18.43 at current exchange, after the company said in a trading update that revenue in the three months to June 30 climbed 11.2 percent to 408 million pounds, or $644.6 million at average exchange rates for the period.
The revenue figure fell at the bottom end of the market consensus, and landed just short of some analysts’ targets. In the previous quarter Burberry’s sales grew 16.1 percent.
The news dragged down other luxury stocks at the close of trading on Wednesday, including Tod’s, which sank 4.8 percent, Ferragamo, down 6.6 percent, and Richemont, which retreated 3.4 percent.
“Say what you want, but the reality is that growth has slowed,” said one Paris-based analyst who spoke on condition of anonymity. “Virtually all the luxury players I have spoken to have flagged a slowdown in Mainland China and a stagnant Europe.
“The markets are also assuming that things have gotten tougher, and I think it’s fair to expect a cautious message from the luxury brands probably through the third quarter.”
Other analysts were more upbeat.
Seymour Pierce Research said that it was expecting Burberry’s shares to be weaker on Wednesday, but it still considered the company to be a “strong, long-term growth story and with significant geographical and product mix opportunities as well as operational leverage to come.”
A London-based analyst who follows Burberry pointed out that the first quarter is traditionally the brand’s smallest quarter with the most difficult comparatives.
“A low, single-digit percentage point miss on what is the smallest, toughest quarter of the year for Burberry is not dramatic — we’re not talking about a 10 percent miss,” said the analyst, who also spoke on condition of anonymity.
Indeed, Burberry has left its full-year guidance unchanged: Pretax profits are still set to hit 440 million pounds, or $682 million, for the 2012-2013 fiscal year.
Burberry chief executive Angela Ahrendts called the first-quarter performance “robust,” despite what she referred to as a more challenging external environment. In a phone call with WWD, Stacey Cartwright, Burberry’s chief financial officer, talked about the impact of the macro-economic environment:
“You look at the upcoming elections in the U.S., the euro crisis, China. Things are happening everywhere, markets are uneven and it’s hard to discern trends,” she said.
In the first quarter, retail sales — which now generate 70 percent of the business — increased by 14 percent and the fastest-growing categories remain core outerwear, large leather goods, men’s tailoring and accessories.
Burberry said the quarterly growth came partly from Asia-Pacific, where sales advanced 20.6 percent, and Europe, where sales were up 10.3 percent. Cartwright added that, in China, comparative retail growth was in the “midteens,” while in Europe — and especially the U.K., France and Germany —tourists were driving the revenue increases.
“It’s the traveling luxury consumer who is fueling growth in Europe — the growth is not coming from domestic customers,” she said. Italy and Korea remain weak.
In the Americas — where quarterly growth was 3.4 percent — Cartwright acknowledged that the brand continued to cull the number of wholesale accounts in favor of retail stores. “We’re managing inventory more tightly, and focusing on the top doors with the right adjacencies,” she said.
In the first quarter, Burberry’s average selling price increased in the mid- to high-single digits, as Burberry continues to de-emphasize its opening price point products in favor of higher-price categories.
As reported in May, Burberry plans to terminate its Nova Check, one of the firm’s early iconic patterns with a khaki background and burgundy, black and white stripes. The company said the Asia-made Nova Check accessories line is still a big, highly profitable business, but is no longer right for the brand.
“That has diluted some of the first-quarter figures,” said an industry observer. “But it was a deliberate choice by Burberry as they become more of a luxury brand.”
The company said global product licenses delivered double-digit growth, and that Japanese apparel royalty income was broadly unchanged. However, Japanese nonapparel income was down, largely reflecting the termination of certain licenses in June 2011.