Burberry Strategy on Track Despite Slowdown in Sales

The brand said Thursday it will continue to open as many as 10 stores in Mainland China each year, in line with its original strategy.

LONDON — The luxury sector might be breathing easier as a bullish Burberry, undaunted by slower demand in Mainland China, said Thursday it will continue to open as many as 10 stores there each year, in line with its original strategy.

This story first appeared in the October 12, 2012 issue of WWD.  Subscribe Today.

The optimism comes on the heels of a warning last month of a slowdown in the company’s retail sales, which shook luxury sector stocks and sent Burberry’s plummeting nearly 21 percent. The brand did in fact report a slowdown in revenue growth in the second quarter, due partly to declining footfall in China, but said the country’s underpinnings were solid.

Burberry added it remains keen on the potential for growth in China’s flagship markets in particular.

“In Shanghai, for example, we’re not nearly at the level we should be for such a vibrant, dynamic market,” said Burberry’s chief financial officer Stacey Cartwright, adding that the company planned to open three flagships in that city over the next 12 months.

Burberry currently has 68 stores in 32 cities in Mainland China, and the aim is to get to 100 stores in 35 cities in the medium term.

Cartwright was speaking on a conference call, following a second-half trading update and news that Burberry plans to set up an in-house fragrance and beauty division after severing ties with Inter Parfums SA in March.

Burberry’s bullishness was clearly infectious, as the stock closed up 13.3 percent to 11.36 pounds, or $18.21 at current exchange rates.

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Revenue in the three months ended Sept. 30 grew 2.6 percent to 475 million pounds, or $751 million at average exchange rates for the period.

Burberry said that a slowdown in footfall worldwide — in China and the U.K. in particular — contributed to the modest growth.

In the first quarter, growth was 11.2 percent, and in the final quarter of last year, it was 16.1 percent.

Burberry said the lessening in traffic was mitigated by higher average transaction values, and two of the brand’s priciest lines — Prorsum, the runway collection, and London — outperformed in the period.

In September, Burberry reported that same-store sales were flat, with new stores kicking in the 6 percent sales growth in the 10-week period. As a result, it said adjusted pretax profits for the full year would be “around the lower end” of market expectations.

On Thursday, the company noted that the second-quarter picture had improved slightly, with same-store sales rising 1 percent in the full three months, and new stores still contributing 6 percent of the overall retail growth.

In the quarter, Burberry cited a “modest improvement” in all three major regions. Comparable-store sales in the U.S. and Europe were unchanged year-on-year, while Asia-Pacific delivered slightly positive comparable-store growth.

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Compared to the first quarter, Hong Kong, France and Germany maintained their “robust” performance, Burberry said, while the U.K. and China slowed. Korea and Italy remained weak.

With regard to the slowdown in China and the U.K., Cartwright said a variety of factors were at play: Gift-giving in China has slowed because of new government regulations, and because of a “macro” slowdown triggered by upcoming elections.

She added that Burberry’s London stores — like so many other fashion and luxury outlets — suffered from the Olympic Games, with footfall in London decelerating in the second half of July and in August.

Locals either refused to travel into the center of town, or they took early holidays to avoid crowds. Olympic ticket holders tended to congregate at the main sports venue in east London, and most did not spend on luxury goods.

Cartwright said traffic was down generally because the “aspirational customer” was reluctant to spend, while the high-spending customer proved more resilient to the ups and downs of the macro environment.

Burberry also revealed the bare bones of its plans for the beauty and fragrance business, which, until now, has been operating under license with Inter Parfums.

“We’re very excited to be taking the business in-house, which is in line with our strategy” of controlling the brand and its distribution, said Cartwright. She noted that Burberry would be stepping into the shoes of its licensing partner, Inter Parfums, and leveraging the relationships it already has with suppliers, distributors and logistics partners.

“We’re not reinventing anything, and we see this move as a natural evolution of the business,” she said. Fragrance and beauty will be run as the company’s fifth product division, alongside accessories and women’s, men’s and children’s apparel.

In fragrance and beauty, Burberry already controls product design, packaging and marketing activities, and the company said it would be making “key senior hires” to support the back end of the business.

To facilitate the transition, the relationship with Inter Parfums has been extended until March 31. Burberry will begin direct operations on April 1. The company indicated it will give more details about the new division on Nov. 7, when full interim results are released.

In a research note on Thursday, Investec, the bank and asset manager, said it felt “slight relief” in light of Burberry’s profit warning last month.

“The decision to take fragrance in-house is a small negative (at least until we hear the financials on Nov. 7). We think the retail like-for-like beat will offset disappointments elsewhere,” the bank said in its report.

Deutsche Bank was bullish about the 1 percent increase in second-quarter like-for-like sales, and the increase in the average transaction value during the period. “This stabilization, as well as evidence that full-price sales and average transaction value have risen, should provide reassurance to the market,” the bank indicated.

In the second quarter, wholesale sales fell 1.3 percent to 151 million pounds, or $239 million at average exchange rates for the period, due to the re-phasing of deliveries into the first quarter from the second quarter. In the first half, wholesale sales grew 2 percent to 253 million pounds, or $400 million.

Burberry said that in the second half it is expecting broadly flat underlying wholesale revenue year-on-year, reflecting the rationalization of certain opening-price-point products in core accessories and outerwear.

As reported, Burberry has phased out the Nova Check, one of the firm’s early iconic patterns with a khaki background and burgundy, black and white stripes. The company admitted the Asia-made Nova Check accessories line was a big, highly profitable business, but no longer right for the brand.

“With a more cautious approach from [wholesale] customers globally, the United States, Asia travel retail and emerging markets are expected to continue to grow, offset by further contraction of small specialty wholesale accounts, especially in southern Europe,” the company stated.

Similar to other brands such as Gucci, Burberry has been pruning its network of wholesale clients in countries such as Italy as it pursues a strategy of building its own stores, and focusing on prominent retail outlets worldwide.

In the second half, Burberry said average retail selling space is on plan to increase by about 14 percent. Openings in flagship markets will include Chicago, Shanghai and a stand-alone men’s wear store in London, as well as further stores in Brazil, Mexico and the Middle East.

In the six months to Sept. 30, Burberry revenue climbed 6.4 percent to 883 million pounds, or $1.4 billion.