LONDON — Pain — and some gain.
Burberry has begun to swallow bitter medicine in its bid to slim down and reshape itself into a more competitive machine — and it’s already seeing some modest progress.
On Wednesday, the British brand revealed a 39.7 percent drop in first-half profits to 72 million pounds, or $98.6 million, on an underlying 4 percent sales decline in the six months to Sept. 30.
The company’s restructuring strategy, termination of licenses, distribution deals and wholesale accounts all dented the bottom line, with underlying adjusted pretax profit falling 24 percent.
Bailey told WWD the company was taking “early pain” in its bid to clean up certain areas of the business as it tries to elevate the brand in a challenging environment for luxury, with sales growth kicking into reverse and tourist patterns — especially among the Chinese — changing fast.
“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.”
Carol Fairweather, chief financial officer, said Burberry was keeping its costs under control with 6 million pounds, or $7.4 million, saved in the half.
As reported, Burberry is aiming for annualized savings of 20 million pounds, or $25 million, for a total of 100 million pounds, or $124 million, by 2019.
Investors didn’t agree, however, with the stock price closing down 2 percent to 14.51 pounds, or $17.99, on a volatile post-U.S. election day for markets.
Analysts were upbeat about the changes, with UBS flagging “better cost control” and profit numbers higher than expected, while Luca Solca, managing director at Exane BNP Paribas, said the company appears to be “making advances on its cost-cutting program, brand repositioning and strengthening its leadership in digital.”
Looking ahead, Nivindya Sharma, senior analyst at Verdict Retail, said in the second half, licensing will be the main drag on growth due to the expiry of a number of Japanese deals after Burberry took its business in-house last year.
“The environment for luxury brands will remain challenging over the remainder of 2016 and into 2017 as consumer confidence remain shaky across markets affecting disposable incomes,” said Sharma, adding that Burberry was in a good position “especially in terms of product innovation and customer experience.”
She pointed to the company’s see-now, buy-now strategy as a future growth driver, and said the recent revamp of burberry.com will improve conversion levels and customer satisfaction.
Bailey originally outlined an austerity plan in May, with the over-arching goal of outstripping luxury market growth, which is projected to be 2 to 3 percent in coming years.
He said layoffs were “embedded in the plan,” although he did not elaborate on the number or timing of job losses.
Bailey also confirmed that prices in the U.K. would increase across categories in the next week or so to take into account the weak pound “as many of our peers have done.”
He elaborated on the key points laid down in his original strategy, including ongoing cuts to the product assortment.
In May, Burberry slashed the number of products 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).
Burberry has also started to develop more commercial, lower-priced iterations of some of the runway pieces, he said, and has been working on bolstering its offer at the top and bottom ends of the pricing range. The company has been introducing gifts such as colored pencil packs, wristlets and charms at entry level, while 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, while 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.
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 purchases by local customers alike.
On Wednesday, Burberry also said that retail/wholesale profit for the full year would 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 pound, or $130 million, boost based on Sept. 30 rates.
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.
He said it was right to make a change “as customer behaviors evolve. It positions us at the forefront of a changing industry paradigm,” he said.
Earlier this week, Burberry revealed the continuation of its partnership with The New Craftsmen, with which it collaborated for an installation at its see-now, buy-now show in September.
British craftsmen, who were demonstrating their work in Burberry’s September show venue, will be doing the same at Thomas’s, Burberry’s all day café inside the London Regent Street flagship, with a series of in-store events, activities and products.
They will also be making such things as embroidered linen table napkins, hand-knitted Christmas stockings, tassels and personalized wrapping paper in the run-up to the holiday season in addition doing scarf calligraphy, leather hand painting and wreath customization.