Burberry Pre-Fall 2016

LONDON — Mainland Chinese consumers gave Burberry a boost in the first quarter, snapping up rucksacks — a bestseller — and returning to Hong Kong to shop.

In a trading update, Burberry said retail revenue in the three months to June 30 grew 13 percent at reported exchange to 478 million pounds. At constant exchange, growth was 3 percent, outstripping some analysts’ forecasts, while like-for-like sales were up 4 percent.

Burberry shares on the London Stock Exchange closed up 3.2 percent to 16.30 pounds, or $20.98.

Marco Gobbetti made his first public remarks as chief executive officer in the update. He took over the ceo position last week and is expected to address shareholders at the annual general meeting later this week.

On Wednesday, he said the company was pleased with its performance in the quarter, while “mindful” of the work still to do. “This is a time of great change for Burberry and the wider luxury industry. I look forward to building on the foundations Christopher and the team have put in place and creating new energy to drive growth,” Gobbetti said.

Gobbetti took over from Christopher Bailey, who remains chief creative officer and who will take on the new title of president.

Mainland China was behind the midsingle-digit percentage growth in the Asia-Pacific region, and that increase offset uneven sales in Europe and the U.S. China digital revenues more than doubled compared with the prior year.

Mainland China’s like-for-like sales rose in the midteens and the company said Chinese customers are returning to Hong Kong to shop, although overall Chinese tourist spending slowed. South Korea remained “challenging” due to the macro environment, Burberry said.

The Chinese are also partly behind the success of the rucksack, the best-selling Burberry bag style in the three months ended June 30.

The large version, in technical nylon and leather, costs about $1,250, and the bag can be customized with monogramming or patches.

In a results call, Burberry’s chief operating and chief financial officer Julie Brown said the style had been “very, very popular with our Asian customers.”

The Banner, Buckle and the new DK88 bags were also among the top sellers in the three-month period, she added. Overall, fashion and innovation led growth in the quarter, with leather goods growing by a midteens percentage point.

Growth in China helped to offset shrinking demand elsewhere. Growth in the EMEIA, or Europe, the Middle East, India and Africa region, was in the high single-digits, it was driven mainly by U.K. sales and the weaker pound.

Brown flagged weakness in some parts of Europe, such as Italy and France, and added that the Middle East remained challenging, impacted by the macro environment.

“Italy was particularly challenged,” said Brown, adding that may have been due to the local competition. She said France was “more subdued,” following a strong performance in the fourth quarter of last year.

Although the U.K. market remains strong, it saw a deceleration in growth towards the end of the quarter. Brown said U.K. domestic sales continue to thrive and added that markdowns in the last part of the quarter contributed to sales growth.

She also said that Burberry went into the sales with less inventory than in prior years, the result of its efforts to slim down and rationalize operations. The company continues to slash the number of products on offer, which are down more than 10 percent year-on-year.

Burberry witnessed low single-digit percentage decline in the Americas due in part to negative footfall and the relative strength of the U.S. dollar driving a strong increase in sales from U.S. customers shopping abroad rather than at home. Burberry is also refining its distribution in the region and has not been taking part in extended sales periods so common among the big U.S. department stores.

Burberry said direct-to-consumer revenue continued its growth with mobile transactions now represent 40 percent of digital sales. Burberry said its customer app is now live in five markets following its launch in the U.K. last year.

Thomas Chauvet at Citi said the growth in retail sales was a “positive outcome, consistent with continued signs of cyclical demand recovery at industry level.” He said the 3 percent gain in the period was also due to easy comparatives from last year and the launch of high-profile products such as the DK88 bag.

As Burberry continues to look at costs and the overall organization of the company, it is keeping plans for a state-of-the-art factory near Leeds, Yorkshire on ice. Brown said the company is taking its time considering whether it makes sense to move.

Yorkshire is the historic hub of Burberry’s trenchcoat manufacturing, and the company currently has two factories there.

A new weaving and manufacturing facility for the trench was set to open in 2018, although that deadline was pushed back last year due to factors such as the result of the Brexit referendum, waning demand for luxury goods and management changes at Burberry.

Brown said there are various options under review, including refurbishing the current factories or going ahead with the new build on the land that Burberry already owns near Leeds. “We will take our time. There is no need to move immediately on this,” she said.

Brown also addressed the bricks-and-mortar portfolio, saying that footfall at mainline stores remained “challenging,” although it was partly offset by spend from returning top customers, whom Burberry continues to woo. Direct-to-consumer digital sales were also on the rise in the quarter.

For the full year, Burberry said it would focus on productivity from its current store footprint with no material contribution from net new space expected.

Brown said while there are no plans to open new stores, Burberry is constantly “refreshing” the stores it does have and putting the focus on retail excellence, selling more effectively and making its existing spaces as productive as possible. There are no current plans to close stores.

In the first half, total underlying wholesale revenue is set to be broadly flat, while in the second half, Burberry said it expects underlying wholesale revenue, excluding beauty, to be down due to changes the company is making to tighten distribution and re-position itself in certain markets.

The company added that the expected negative impact of year-over-year exchange rate movements on reported, adjusted pre-tax profit for the full 2017-18 year is around 25 million pounds — slightly less than Burberry had forecast in April.

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