LONDON – The road is long, and the journey has only just begun, said Christopher Bailey, Burberry’s chief creative and chief executive officer, as he updated markets on the brand’s restructuring plan, and unveiled a 39.7 percent drop in first-half profits to 72 million pounds, or $98.6 million.
“Achieving our financial goals is going to take time. We’re in a transition period and just starting to execute our strategies as we lay the foundations for future outperformance. But we are very much on track and confident we will get there and achieve our growth and productivity ambitions,” Bailey said in an exclusive interview with WWD.
He also said the company was taking “early pain” in its bid to clean up certain areas of the business – drastically reducing the number of doors carrying its fragrances and slimming down its roster of wholesale clients – as it tries to elevate the brand in challenging environment for luxury.
New and ongoing charges weighed on Burberry’s bottom line in the half, including restructuring costs and anticipated hits from terminated licensing and wholesale deals. Adjusted pre-tax profit was down 4 percent to 146 million pounds, or $200 million, on a reported basis, boosted by the weak pound. Underlying adjusted pre-tax profit fell 24 percent.
On Wednesday, the company declined to comment on the election of Donald Trump as president, and the impact that might have on consumer confidence and U.S. sales, which generate about 20 percent of Burberry’s revenue. Burberry also declined to comment on speculation – quickly quashed last month – that Burberry was merging with Coach.
In mid-morning trading on Wednesday, Burberry shares were down 1.7 percent to 14.56 pounds, or $18.
As reported, revenue in the six months to Sept. 30 rose 5 percent to 1.16 billion pounds, or $1.52 billion, fuelled by currency fluctuations, while underlying sales in the period were down 4 percent due partly to planned declines in wholesale and licensing.
Bailey originally outlined an austerity plan in May, aimed at saving 100 million pounds, or $124 million, by 2019, and is repositioning the company for the future. Burberry has said its overarching plan is to outstrip luxury market growth, which is projected to be 2 to 3 percent in coming years.
He called the cuts “painful,” and said layoffs were “embedded in the plan,” although he did not elaborate on the number or timing of job losses. With regard to staffing, he said the priority is ensuring that Burberry has the best talent and that it wasn’t duplicating roles.
Bailey remains fully involved in the business side, even as he awaits the arrival of a new ceo, Marco Gobbetti, who is set to take up his position by the summer of 2017. Gobbetti and Bailey, who will assume the additional title of president, will both report to Sir John Peace, Burberry’s chairman.
Bailey also confirmed that prices in the U.K. would increase across categories in the next week or so to take into account a weak pound “as many of our peers have done.” He also elaborated on the key points laid down in his original strategy.
In May, Burberry cut its product assortment by more than 15 percent, and has done the same again for the November market (buyers have already begun to write orders for what press and consumers will see on the February runway). He argued the move would give “greater visibility” to fashion and new items both on the shop floor and on screens.
He added that, as the company reorganizes, bags and backpacks have come to the fore, in particular the Banner, the Buckle, and the Bridle, the latter of which made its debut in September. Burberry has also started to develop more commercial, lower-priced iterations of some of the runway pieces, he said.
Burberry has also been working on bolstering its offer at the top and bottom ends of the pricing range, introducing gifts such as colored pencil packs, wristlets and charms at entry level. At the same time, Bailey added, average transaction values in mainline retail went up in the first half.
The company is also focusing more on the local consumer – rather than the increasingly fickle tourist – and responding to criticism from UBS earlier this year that Burberry’s sales densities per square foot were lagging behind its luxury peers.
Burberry has invested in training store staff, expanded its private clients team to more than 30 new locations, and generally amped up its service offer in a bid to get the local customer buying. Bailey said the company has already seen an overall uplift in conversion in key markets, as well as improved customer retention.
He also talked about a new “store profiling model,” that will be in place for the November market. “The aim of this is to take a more scientific approach to merchandising and to ensure our assortments are better tailored to the specific needs and preferences of different locations, with a particular focus on local customers,” said Bailey.
With regard to digital, Bailey said mobile now accounts for more than 50 percent of the mix and that the brand’s new Web site, which launched on desktop in September, has a “much improved” experience. The company is also finalizing its new customer app, which is set to debut in the coming weeks.
He talked about the beauty business, where Burberry is slashing its number of distributors and focusing on core fragrances Burberry Brit and MyBurberry.
The company has replaced Simona Cattaneo, former senior vice president of beauty at Burberry, with an internal promotion while John Smith, Burberry’s chief operating officer, who will leave the company next year, is overseeing the division.
As for the weak pound, Bailey said it’s welcome – but no one’s relying on it to deliver anything more than a short-term boost.
He said the pound – dented by the prospect of a difficult British divorce from the European Union – has positively impacted U.K. tourist flows and boosted Burberry’s financial performance.
“It’s worth pointing out that we’ve also seen improved sales to local customers in the U.K., up low double-digits in the half – but foreign exchange rates move all the time. We think about the business on a global basis.”
Asked to elaborate on the sales and progress of the see-now, buy-now September collection, Bailey said it was a milestone moment for the brand.
“It demonstrated our agility, and above all, it reinforced our belief that the needs of the customer must always be our priority,” he said, adding that it was right to make a change “as customer behaviors evolve. It positions us at the forefront of a changing industry paradigm.”
He said the show exceeded the company’s expectations.
“We saw a record amount of press coverage and reach on social media and we’ve had a great response from our customers. We’ve seen particularly strong sales in areas of strategic focus such as outerwear, with military jackets becoming a seasonal trend, and bags, with the runway Bridle. We’re also very pleased with the traction from more commercial pieces inspired by the runway collection and made available shortly after.”
On Wednesday during a conference call, Burberry’s chief financial officer Carol Fairweather said the company was “getting on with the business” of generating top and bottom-line growth for Burberry and that the company was keeping its costs under control with 6 million pounds, or $7.4 million, of the planned 20 million pounds, or $25 million, already saved.
While she did not comment on the election of Donald Trump as U.S. president, she conceded it would “clearly have an impact on currencies.”
Burberry said in its first half profit statement that retail/wholesale profit for the full year will benefit further from the weak pound, getting a 125 million pounds boost, or $155 million, based on Oct. 31 exchange rates, compared with a 105 million pounds, or $130 million, boost based on Sept. 30 rates.