Backstage Burberry RTW Fall 2017

LONDON — Move over French and Italian mega-brands. Marco Gobbetti is thinking big for Burberry, with plans to cement the British player in the luxury space, grab market share in leather goods, and deliver fresh fashion product to customers at an ever-quickening pace.

Burberry’s new chief executive officer laid out a punchy plan for the next five years, one that will start slowly and build momentum as soon as he finds a designer to replace Christopher Bailey, Burberry’s president and chief creative officer, who tendered his resignation a week ago.

“Our growth in the past is not necessarily what will fuel our future success,” Gobbetti told analysts during a presentation at Burberry’s Horseferry House headquarters, overlooking the Thames.

“Today the luxury sector is changing. The luxury customer is also changing. They are moving away from traditional notions of luxury and are looking for what is casual, fun, what fits into their lives. They expect creativity, they care about experiences and use luxury goods to express their opinions. They want fashion and newness, and only innovating and exciting products will interest them to buy,” he said. “In the digital age, they engage and expect continuous and new content.”

Gobbetti wants to reverse the trend of slower growth compared with Burberry’s luxury peers, and over the next five years, is looking to achieve “high-single-digit” revenue growth — higher than the 4 to 5 percent that Bain has projected for the sector in the medium term — and “meaningful” operating margin expansion.

He’s also on a mission to revamp the brick-and-mortar store portfolio, with plans to boost annual capital expenditure to a maximum of 210 million pounds, compared with the historical average of 150 million pounds. In the meantime, he’ll give Burberry’s brick-and-mortar outlets a quick refresh beginning early next year.

Digital will also get a new life, with a more editorialized web site set to launch early next year, featuring more curation, personalization and a joined-up omnichannel experience. The company said 40 percent of digital revenue now comes from mobile, with growth led by Asia-Pacific.

While the strategy makes sense, the markets were jittery about the slow start to Gobbetti’s five-year plan, when sales and operating profit are forecast to be flat as the company reshapes itself.

Shares were down 11 percent to 17.58 pounds in midmorning trading following the announcement of Gobbetti’s plan and Burberry’s first-half results. They closed down 10 percent at 17.87 pounds.

During the analyst presentation, Gobbetti was mum on Bailey’s replacement and declined to comment on whether Phoebe Philo, who was recently spotted at Burberry’s Horseferry House headquarters for an early morning meeting, would take the job.

Philo had previously worked with Gobbetti at Céline, which the two helped transform into an 800 million euro operation. Sources also believe she’s ready to cut short her tenure at the French fashion house, which she has made over in her image.

Gobbetti said the process of finding Bailey’s successor had begun and he’s drawing up the details of the job description, although things could take a while. In the meantime, he won’t be saying anything until he’s found Mr. or Mrs. Right. “I will never comment on any rumors. There will be plenty, prepare yourselves, but I won’t comment,” he said.

He did say that person could be from anywhere, and emphasized that he’s not wedded to the idea of hiring a British designer.

“The brand is British, the foundation of this brand is very British and I think it’s a great asset and an incredible opportunity. But I wouldn’t draw the conclusion that only a British person can interpret Burberry” for an international customer.

“You have plenty of examples of world-famous French, European or American brands that are led creatively by people from different countries. Being British is not a requirement,” he stressed.

Whomever Gobbetti picks — market speculation has ranged from Philo to Kim Jones (if he doesn’t go to Versace), Riccardo Tisci, Alber Elbaz, Tomas Maier and Stuart Vevers — he sees them staying for at least a decade. He wants the designer to lay down a new luxury template for the brand, and appeal to the new, laid-back luxury customer who’s dressing ever more casually.

Hence, the modest start to his five-year plan, which entails two years of flat revenue growth and adjusted operating margin. Gobbetti doesn’t want to make too many creative changes until the designer is in place and able to articulate his or her vision.

Over the next two years, Gobbetti said he’ll be consolidating the brand’s position in the luxury space by aligning prices with Burberry’s luxury peers, upping the levels of in-store service, rethinking wholesale and outlet distribution, and putting a better focus on digital and audience engagement.

“We are already playing in the luxury space. We’re already there. This is not about a movement ‘up.’ There are categories where we think our pricing does not represent brand value, prices that are under those who we consider to be our luxury peers, and we’ll revise the offer accordingly,” he said, adding that changes would also be made in distribution, customer experience and communication.

He used the example of a Burberry white polo shirt, which is half the price of the ones offered by some of the brand’s competitors. By contrast, the Burberry DK88 bag is priced in line with comparable models from luxury players.

Although he didn’t offer any specifics, Gobbetti said he’s looking to “rationalize” nonluxury wholesale and retail doors. The emphasis will be on stores in the U.S., Burberry’s single largest market, and later in the Europe, the Middle East and Africa regions.

In many ways, it’s a continuation of a strategy Burberry has been undertaking for years, seeking to elevate the wholesale portfolio and steer clear of the discounting and seasonal promotions in the department stores where Burberry is sold.

“We must have a very strong position in the U.S., but there are points of sale that may not be necessarily strategic going forward. At the same time, there are points of sale where we have the capacity to improve our presence, ones that are strategic for us,” said Gobbetti, who has made multiple trips to the U.S. since taking up his role in July.

“It’s really about building wholesale. Most of the American partners we have worked with for a long time, we know their distribution, we have the product, we have the brand. They are professionals, they know exactly what we expect and they are very keen on Burberry. I’m very much in favor of wholesale, it’s an excellent way to do business in areas where you cannot go with your retail,” he said.

Gobbetti said there would also be a renewed focus on speed-to-market, and getting new fashion product into consumers’ hands as quickly as possible. He said Burberry remained committed to the see-now-buy-now runway model, and — if anything — wanted to see more frequent, curated product deliveries supported by dedicated ad campaigns.

Judy Collinson, Burberry’s chief merchandising officer, also addressed analysts on Thursday and said Burberry plans to add novelty to core categories, “entice with newness, capsules and collaborations,” and emphasized that Burberry would remain “unconstrained by the traditional” fashion calendar.

“Creativity means refreshing products — and we’ve started already,” Gobbetti said. “Customers are calling for it, and we are performing much better in newness and in fashion than in what is simply replenishment of products. So you need to update regularly and constantly.”

Gobbetti also plans to ramp up Burberry’s leather goods offer — with a broader range of product, and more footwear — and cross-sell leather accessories with clothing as part of a strategy to “wardrobe” customers from head-to-toe rather than sell them a single item.

“We have a pretty good leather accessories business for an apparel company, and we’re starting from a position of strength. I expect the leather goods business to grow significantly,” he said, adding that he’s not looking to rely on leather like a Louis Vuitton or a Gucci would.

The plan is to offer a bigger breadth of price points and increase the size and prominence and space dedicated to leather goods in the stores. An upgraded and expanded leather goods offer will play its part in boosting Burberry’s retail productivity, another area where it’s been lagging behind its peers. Gobbetti pointed out that Burberry has been notching below-average sales per square meter compared with the luxury leather goods average.

The reception from analysts was lukewarm. “We leave the conference with few hard facts on how, exactly, things will work — visibility remains somewhat low,” wrote Luca Solca, sector head, luxury goods at Exane BNP Paribas. “The implementation of the new plan will take time to show visible results, at any rate, so we see little hurry to buy the shares.”

Barclays called out Gobbetti’s slow-burn growth strategy, “which will result in another two years of flat operating performance, a longtime horizon.”

Burberry also released its first-half results on Thursday, with operating profit up 24 percent to 127 million pounds on revenues of 1.26 billion pounds.

Revenue in the six months to Sept. 30 was up 9 percent on a reported basis and 4 percent on an underlying one, with comparative retail sales also rising 4 percent.

Profit after tax climbed 29 percent in the six months to 93 million pounds. The boost to profits came from the phasing of costs between the two halves of the year and from a “significant improvement” in beauty profitability following Burberry’s new license with Coty Inc., which came into effect on Oct. 2, the company said.

Mainland China outperformed in the half, delivering midteens percentage growth, with a consistent performance across both quarters. Hong Kong returned to growth in the second quarter and the Asia-Pacific region notched midsingle-digit percentage growth.

The Americas saw a “slight decline” in revenue with domestic and tourist spending remaining negative. In Europe, the U.K. notched double-digit growth due to the weaker pound, although the post-Brexit referendum effects began to wear off in the second quarter.

On the Continent, Italy remained soft while France and Germany improved in the quarter, Burberry said.

Gobbetti also addressed questions about Bailey’s surprise decision to depart, leaving him looking for a new creative chief.

“Christopher made a decision after 17 years at this brand — a big portion of his life, professional and personal. I think he looked at the next 10 years, and he said: ‘Either I commit, or I don’t.’ I had no part in it, and I’m sad to see him go,” he said. “As I said six months ago, I was really looking forward to a partnership with him, but I understand, and there’s nothing I can do, unfortunately. I am very grateful for the legacy he leaves and the strong foundation on which we can build the brand.”

On the sidelines of the presentation, Bailey said while his last collection for Burberry will be in February, he remains committed to Burberry until the end of next year. He declined comment on his future plans, except to say that he planned to spend more time with his family.

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