LONDON — Like many of its peers, Burberry is bracing for a no-deal Brexit, although if the scenario comes to pass it won’t be pretty, the company said as it reported a small dip in third quarter retail sales to 711 million pounds.
In a frank exchange with journalists on a call, Burberry’s chief operating and financial officer Julie Brown said the company was taking “mitigating actions” in preparation for a no-deal Brexit, which would see the U.K. quit the European Union with zero clarity on trade and its future relationship with the region.
“We still remain hopeful that Britain will have the closest possible relationship with the E.U. after Brexit,” said Brown, adding that Burberry is continuing to hold talks with government representatives and asking them to work toward a deal before the U.K. leaves the union on March 29.
Brown added that in the event of a no-deal Brexit, Burberry’s supply chain would be disrupted and the company, like others, would be subject to World Trade Organization rules.
For Burberry, that would mean import duties “in the low tens of millions of pounds” on an annual basis. The costs, she said, would hit the brand’s EBIT, or earnings before interest and taxes.
“A no-deal would be bad news for Burberry, but we would manage, and we continue to model for different Brexit scenarios,” she said.
The risk of a no-deal Brexit has grown more likely after British Members of Parliament shot down Prime Minister Theresa May’s Brexit plan last week, the biggest government defeat in the country’s history. May now has to come up with a Plan B, with another vote in Parliament set for Jan. 29.
Labor leader Jeremy Corbyn is urging the prime minister to eliminate the possibility of a no-deal Brexit, while one of the government’s business ministers, Richard Harrington, said earlier this week that a chaotic exit from the EU would be an “absolute disaster,” due chiefly to the onerous tariffs and trade barriers U.K. businesses would face.
Last week, following May’s defeat in the House of Commons, the British Fashion Council said it was backing a proposal for a public vote on the final Brexit deal, whatever that may be.
“With an industry that is predominantly small- and medium-size enterprises, we would struggle to cope with the trade realities that a no-deal Brexit would bring,” the BFC said.
The industry organization said it would continue to work with government and designer businesses to navigate “these difficult times,” and would consider all options put forward.
During the Q3 call on Wednesday, Brown said a no-deal Brexit would usher in “operational complexities for the supply chain,” with costs and delays impacting the movement of raw materials, samples and logistics, and therefore design, product development and orders.
Burberry makes its scarves in Scotland and trench coats in the U.K., but many of its suppliers and manufacturers are on the Continent, or further afield.
As many British businesses stockpile supplies and warehousing costs skyrocket, Brown said that Burberry, too, has been allocating additional inventories “to relevant areas.”
She said the company was also concerned about the fate of its non-British employees, but added that Burberry is committed to remaining in the U.K., where about one-third of its global workforce is based.
Brexit aside, Brown was upbeat about business performance in the 13 weeks to Dec. 29. Investors concurred, sending the share price up 2.9 percent to close at 18.28 pounds on Wednesday.
During the key holiday period, retail revenue dipped 1 percent to 711 million pounds at reported exchange rates. It fell 2 percent at constant rates.
Comparable store sales were up 1 percent, with a consistent performance across all regions, although that figure disappointed analysts, who had penciled in a 2 percent like-for-like increase. The lower-than-expected increase was due partly to phased changes in Burberry’s reporting period and accounting standards.
Asia-Pacific benefited from sales growth in Mainland China, which was up in the mid-single digits, although Brown said that sales in Hong Kong and Japan were not as vigorous and fewer Chinese consumers were shopping in Korea.
Brown reiterated that the Chinese travel and purchase depending on where they can get the best exchange rates. She added there was no material impact from the U.S.-China trade war in the quarter.
EMEIA, the Europe, Middle East, India and Africa region, logged a “small improvement” in tourist spending compared with Q2, while the Americas region was impacted by “softer” footfall trends, with sales in the U.S. slowing to low-single digit growth.
Brown said the “yellow vests” protests dented Burberry’s French business as stores were forced to shut during critical shopping weekends in the run-up to Christmas. France represents about 3 to 4 percent of Burberry’s business.
In the period, retail space shrank by 1 percent, with two net store closures in the quarter.
Burberry said wholesale clients responded positively to chief creative officer Riccardo Tisci’s commercial product lines with U.S. wholesale customers doubling their orders in the period. The U.S. wholesale business, which has been downsized considerably to focus on top accounts, represents 5 percent of sales.
Brown said tops, trousers and skirts had all performed well, while the new Belt Bag was a top seller. She added that Burberry is still building out its pricing architecture for leather goods and it will take “a number of years” to achieve a full product positioning in handbags.
The company said it was looking forward to the arrival of Tisci’s first collection on the shop floor at the end of February, and said that in the meantime it was building “heat” around the brand with initiatives such as the festive campaign, Vivienne Westwood collaboration and logo B-Series product drops.
Brown called Burberry’s December collaboration with Westwood “extremely successful,” and said certain pieces sold out within a few hours following the launch.
The company stressed that at this stage of its transition, it is navigating the business between “the new branding and vision for Burberry” and the previous collection that’s in stores now, and which “does not yet reflect our new positioning.”
Burberry maintained its guidance of “broadly stable revenue” and adjusted operating margin at constant exchange as well as the delivery of $100 million in cost savings.
Marco Gobbetti, Burberry’s chief executive officer, who has been working to cement the brand in the luxury segment, said he was pleased with the progress in the quarter “as we continued to build brand heat around our new creative vision, and shift consumer perception of Burberry.”
He added that “excitement is growing” ahead of next month’s launch of Tisci’s debut collection, and that the company would be refurbishing 10 stores by the end of the financial year, which wraps at the end of March.