LONDON — Burberry is clamping down on expenses and getting cozier with the increasingly cautious Mainland Chinese shopper after a worse-than-expected slowdown in first-half revenues.
Analysts were left slack-jawed by a 4 percent decline in same-store sales in the second quarter, which compared with their projections of 5 percent growth. RBC Capital Markets called the second-quarter performance “far worse than feared,” and Barclays referred to the deterioration as surprising and “very disappointing.”
In his report, Thomas Chauvet of Citi pointed out that the July to September period was Burberry’s first quarter of negative same-store sales since the third quarter of 2009 — the height of the financial crisis. Chauvet had expected a 7 percent spike in the second quarter like-for-like retail figure.
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Luca Solca, managing director at Exane BNP Paribas, went a step farther, and argued that the first-half slowdown may actually be a case of “brand-specific fatigue” rather than the macro-economic environment, which is proving challenging for all the major luxury brands.
LVMH Moet Hennessy Louis Vuitton, however, said earlier this week that it was beginning to see signs of an upturn in China. Having said that, LVMH took a hit in the third quarter due to the Chinese stock market tumble and the surprise devaluation of the yuan.
Burberry shares plummeted 12.2 percent to 12.46 pounds, or $19.12, in midmorning trading on Thursday after the brand reported that first-half retail sales grew 3.5 percent to 774 million pounds, or $1.19 billion. Stripping out the boost from exchange rates, they grew by 2 percent, compared with 8 percent in the first quarter.
Burberry shares ended the day down 8.3 percent at 13.02 pounds, or $19.98.
Overall revenue, including wholesale sales and licensing, was broadly flat in the six months, edging up 0.5 percent to 1.11 billion pounds, or $1.7 billion, on a reported basis. That figure was 5 percent below analysts’ projections.
Sales of women’s wear were flat in the half, while accessories grew by 2 percent. Men’s wear sales were also flat, and dipped 1 percent on an underlying basis. Top performers included heritage trenchcoats, ponchos, scarves and the Banner handbag.
In the six months, beauty sales were up 4 percent, while the children’s category grew 10 percent on a reported basis, and 8 percent underlying. Dollar figures have been converted from British pounds at average exchange rates for the six months to Sept. 30.
Christopher Bailey, Burberry’s chief executive and chief creative officer, said the external environment had become “more challenging during the half, affecting luxury consumer demand in some of our key markets.”
He noted the company had responded by intensifying its focus on driving sales and productivity, while taking swift action on discretionary costs.
Bailey added the company was looking forward to a more positive sales trend “in the all-important second half. We maintain our focus on — and confidence in — the long-term growth opportunities for our business across channels, regions and product categories.”
While Burberry’s trading update focused on first-half sales, it was the 4 percent decline in same-store sales in the second quarter that got everyone talking. The surprise decline was due to a Burberry-specific storm.
While the difficult macroeconomic environment is impacting all the big groups, Burberry largely fell victim to its retail portfolio.
According to Citi, the company remains overexposed, compared with its luxury peers, both to China and to the U.K., where luxury demand remains soft because of the strong pound. Crucially, the firm remains underexposed to Japan, a market that has bounced back with vigor and become a magnet for Chinese tourists.
After years of operating a license-only business in Japan, Burberry has recently taken direct control of the market and is rapidly expanding its store portfolio. It opened a new store in Shinjuku, Tokyo this week while 19 concessions — excluding children’s wear — were rolled out in the first half. Burberry said it’s so far been seeing “extremely strong growth in Japan.”
By region, Asia-Pacific was the worst performer, with sales down 2 percent on a reported basis, and 6 percent on an underlying one.
EMEIA, or Europe, the Middle East, and Africa region, climbed 1 percent on a reported basis, and 8 percent underlying, while sales in the Americas region were up 6 percent on a reported basis, but were flat on an underlying one, due to uneven sales. The latter region is Burberry’s smallest, and the majority of the company’s U.S. business is reliant on the local consumer, who is also proving cautious.
“Retail revenue slowed in the second quarter, reflecting a more challenging external environment since July, with increased Chinese stock market volatility, the devaluation of the yuan and concerns over slowing global economic growth. “We believe this affected the confidence of luxury consumers — and especially the Chinese consumers — in some of our key markets,” said Carol Fairweather, Burberry’s chief financial officer, during a conference call.
Asked about the mood on the shop floor in Mainland China, Fairweather said footfall remains challenging.
“We’re really focusing on how to convert those customers when they do come into the stores,” she said, adding that Burberry has been working with private clients, evolving the store network and focusing on product.
Solca of Exane BNP Paribas said he believes “blaming the macro and the Chinese market is a bit too convenient.” Following the analyst call, he wrote: “One thing is to get 3 percent growth rather than 5 percent growth, like LVMH, quite another is to get minus 4 percent rather than plus 5 percent, like Burberry.
“There seems to be a sign of brand-specific fatigue at Burberry. In a similar vein to Prada, ‘more of the same’ seems not to be working any more. This issue seems to be hitting Burberry sooner, rather than later. If this is the problem — and this is still a big ‘if,’ at this stage — it would be a difficult problem to fix, and would typically involve injecting new creative resources or producing a significant and fresh creative effort.”
Burberry is anticipating a rosier second half, with a return to a midsingle-digit percentage growth in same-store sales. Fairweather said sales trends began to pick up at the end of September, but she would not discuss current trading.
The company also said its year-end adjusted profit before tax will be broadly in line with analysts’ updated forecasts, which are averaging 445 million pounds, or $683 million.
In a bid to achieve its year-end profit targets, Burberry is seeking to become more efficient on a day-to-day basis and is cutting costs. It is re-allocating marketing spend in the run-up to the key holiday period and has accelerated cost controls across the business.
This year it’s looking to save 40 million to 50 million pounds, or $60 million to $77 million. Some 20 million pounds, or $31 million, will come from discretionary expenses, while the key management team also will take a hit to their pockets as the group cuts 20 million to 30 million pounds, or $31 million to $46 million, from bonus and long-term incentive plans.
According to Fairweather, the cost-cutting means managing areas such as travel and expense budgets, incremental headcount, and asking staffers to “think more creatively” as the company seeks to re-allocate work among different teams during this “tricky time.”
“We normally have a corporate offsite, which we did digitally this year. We saved lots of money just by doing that. So it’s about cost productivity and being more responsible as we go through these challenging times,” she said, adding Burberry continues to manage the business for the long-term.
Looking ahead, Fairweather said the brand would launch its festive campaign in early November, with a new film, and that it was optimistic about new products, such as the lightweight cashmere trench. After focusing on the heritage trench last year, Burberry is now turning its attention to the scarf.
In the second half, Burberry said wholesale revenue at constant exchange rates would be flat against last year, due to “cautious ordering by wholesale customers globally” as well as the re-phasing of orders in the Americas into the first half from the second half of this year.
Beauty, meanwhile, is set to deliver double-digit percentage underlying growth in the second half due to the launch of a new men’s fragrance.
If exchange rates remain at current levels, they will give a boost of 10 million pounds, or $15 million, to year-end profits, compared with the 20 million pounds, or $31 million, originally anticipated.
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Christopher Bailey, Burberry’s chief executive and chief creative officer, said the external environment had become “more challenging during the half, affecting luxury consumer demand in some of our key markets.” He noted the company had responded by intensifying its focus on driving sales and productivity, while taking swift action on discretionary costs.
Bailey added the company was looking forward to a more positive sales trend “in the all-important second half. We maintain our focus on — and confidence in — the long-term growth opportunities for our business across channels, regions and product categories.”
The company said it has further strengthened its product and service initiatives online and offline, and is reallocating marketing spend in the run-up to the festive period. It has also accelerated cost controls across the business.
Asia-Pacific, a high-margin market where Burberry has a large concentration of stores, posted the worst performance, with sales down 2 percent on a reported basis and 6 percent on an underlying one. EMEIA, or Europe, the Middle East, and Africa, climbed 1 percent on a reported basis and 8 percent underlying, while sales in the Americas region were up 6 percent on a reported basis, but were flat on an underlying one.
Women’s wear sales were flat; accessories grew 2 percent; and men’s wear sales were also flat, but fell 1 percent on an underlying basis. The children’s category grew 10 percent on a reported basis, and 8 percent underlying, while beauty sales were up 4 percent.