LONDON — A surge in full-price sales and an upgrade to full-year operating profit projections may have bolstered Burberry’s shares, but the company still has a long way to go before it can truly compete with its luxury peers.
Burberry needs to be less dependent on off-price outlets, and to fire up brand momentum, especially in women’s wear, according to analysts whose response to the brand’s third-quarter trading was largely tepid — and at odds with the share price, which rose 6.3 percent to close at 18.67 pounds on the London Stock Exchange Wednesday.
With COVID-19 seemingly in retreat, a new store concept rolling out worldwide and a flood of young customers — from the U.S. in particular — snapping up Burberry’s full-price streetwear and sneakers, retail revenue rose 5 percent to 723 million pounds in the third fiscal quarter ended Dec. 25.
At constant exchange, growth in the three-month period was 8 percent.
Comparable store sales rose 7 percent on last year, but fell 3 percent compared with two years ago due to Burberry’s planned exit from markdowns in store, and online.
Burberry has been putting a major focus on full-price sales, part of former chief executive officer Marco Gobbetti’s strategy to upgrade the brand and position it to play in the same arena as competitors owned by Kering and LVMH Moët Hennessy Louis Vuitton.
Under Gobbetti, who has left Burberry to join Salvatore Ferragamo, the British company began to behave more like a luxury brand, with a smaller and more select wholesale client list, a focus on full-price sales, and an enhanced leather goods business.
While painful, the switch to full-price sales has been a success: in the third quarter, full-price sales were up 15 percent year-on-year, and rose 26 percent compared with two years ago.
During a presentation following the results, Burberry’s chief operating and financial officer Julie Brown noted that over the past years the quality of the Burberry business has improved due to the full-price strategy and it hasn’t dampened demand.
Brown said that during the three months all product categories delivered double-digit growth with outerwear, leather goods and digital performing particularly strongly.
Burberry said that full-price outerwear sales were up 38 percent compared with two years ago, while leather goods rose 29 percent compared with the corresponding period in 2019. Digital full-price sales also rose in the high double-digits compared with 2019.
Sneakers remain popular, while the Lola bag family and the new Birch Brown outerwear check have both been successful. Burberry also touted the recent launch of its Lunar New Year campaign, marking the Year of the Tiger with a bespoke product capsule and a dedicated fashion campaign.
Brown added that Burberry has been attracting a new, younger — and male — customer base and seeing serious sales traction in the U.S., in cities including Chicago, Detroit and Atlanta.
The U.S. rivaled China, Burberry’s single-biggest market, as one of the most dynamic regions for growth in the quarter.
Burberry said the Americas region overall saw “continued strong performance,” with full-price comparable store sales up 72 percent compared with two years ago, and driven by new customers.
Overall comparable store sales grew by just 8 percent compared with two years ago, as the Americas region suffered considerably from Burberry’s decision to halt markdowns.
Comparable store sales in Asia-Pacific were flat compared with the corresponding period two years ago. By contrast, full-price comparable store sales “materially accelerated” from the second quarter.
In Mainland China, comparable store sales grew 15 percent, while full-price comparable store sales were up 37 percent versus two years ago.
Burberry said that Japan and South Asia Pacific improved quarter-on-quarter as COVID-19 related restrictions eased, but performance remained soft due to limited tourist traffic.
The EMEIA region, which has been suffering from a lack of international tourists, “improved significantly” quarter-on-quarter although comparable store sales were down 17 percent compared with two years ago, and full-price comparable store sales fell 4 percent.
“We are very encouraged by the performance in EMEIA, given the ongoing drag from the lack of tourists who accounted for around 40 percent of pre-pandemic revenues in the region,” Brown said, adding that Burberry has been making a big effort to appeal to local shoppers with physical and digital activations.
Looking ahead, the company said it’s expecting a bump in profitability due largely to less severe than expected currency headwinds.
Current year adjusted operating profit is now set to grow in the region of 35 percent at constant exchange compared with the prior year.
The negative impact of currency on revenue is expected to be 79 million pounds, down from 100 million pounds. Currency impact on adjusted operating profit should be in the region of 27 million pounds, down from 40 million pounds.
As a result, adjusted operating profit will range from 500 million pounds to 515 million pounds, up from Burberry’s previous estimate of 472 million pounds.
Wholesale growth for the full fiscal year will also be higher than expected. Burberry now estimates that growth will be almost 40 percent, and will contribute to the enhanced year-end profitability.
The company is maintaining its medium-term guidance of “high single-digit” top line growth, and “meaningful margin accretion” at constant exchange rates.
Despite all the positive news, analysts were generally cautious in their outlook.
Royal Bank of Canada’s Piral Dadhania said “it is too early to turn more positive on Burberry as the macroeconomic situation in 2022 is likely to be less supportive than in 2020-2021, and its brand/product momentum is not quite where it needs to be, particularly in women’s wear.”
Luca Solca of Bernstein took a harder line, noting that Burberry “remains barely above its high-water mark sales of two years ago (1 percent), while best-in-class players are now (around) 40 percent ahead.”
Solca pointed out that comparable, same-store sales growth is still 3 percent below two years ago, “as the planned exit of markdowns bites into performance, balanced by continuing progression of full-price” sales growth.
“We see a long path ahead for Burberry to reduce its dependence on off-price,” wrote Solca, who has also urged Burberry to disclose the exact full-price/off-price mix percentage.
Burberry doesn’t break out those figures, but Solca estimates that the brand “is probably dependent” on off-price for around 35 to 40 percent of its sales, and probably more than 50 percent of its profits.
In a report published last November, titled “Burberry: Letter to the (new) CEO,” Solca said a “key problem is that Burberry is more exposed than most to off-price. Reducing it will be painful — but necessary — if ambitious growth goals are to be met. Elevation demands giving up on profitable (but low-quality) business. This may likely weigh heavy on Burberry’s performance for a while.”
Solca believes that Burberry’s off-price exposure “is closer to American brands than European peers. Burberry seems to sit halfway between American accessible luxury and European high-end.”
On Wednesday, Brown said that Burberry would continue to manage its outlet stores “tightly,” and that less inventory was flowing to them anyway due to the company’s exit from markdowns and closer eye on inventory.
She added that Burberry’s retail focus continues to be on the new store concept, which is now present in 31 Burberry units, including a flagship at Plaza 66, Shanghai.
The company said Wednesday it remains on track to deliver around 50 new stores by the end of the financial year, and the concept is transforming “how our customers experience our brand and product and is supporting revenue growth.”
A new London flagship opened in Knightsbridge last summer that spans 9,225 square feet over three floors. Gobbetti worked with Burberry’s chief creative officer Riccardo Tisci and the eminent Italian architect Vincenzo De Cotiis on the concept, which is meant to be timeless rather than trendy.
The new store is bright and spare with lots of tall, arched windows; a network of slim metal rails on the floors and ceilings, some of them configured in an abstract check pattern; black-and-white checkerboard floors, and lots of mirrors reflecting the light pouring in from the street.