LONDON — A perfect — and partly self-inflicted — storm hit Burberry’s revenue in the key third quarter, as the brand wrestled with the impact of COVID-19-related store and outlet closures and curtailed seasonal discounting.
Store closures averaged 7 percent overall in the third quarter, and the situation has only gotten worse in some regions. As of this week, 15 percent of Burberry’s physical stores were shut, the brand confirmed in a trading update on Wednesday.
In addition, after a promising start in October, comparable store sales fell 9 percent in the period, due to Burberry’s deliberate strategy to wind down discounting, and to a lack of international tourists shopping at its upscale outlets in malls run by companies including Value Retail and McArthurGlen worldwide.
Burberry declined to confirm how much of the business is generated by discount outlet stores.
Last November, Burberry had touted a return to growth in comparable store sales in October, the start of the third quarter. It was a hopeful sign after comp-store sales fell 45 percent in the first quarter, and 6 percent in the second quarter, due to the impact of COVID-19.
Julie Brown, chief operating and chief financial officer, said despite the contraction in sales, Burberry was moving in the right direction, with “high-single-digit growth” in the full-price business.
The market seemed to agree, with Burberry’s share price closing up 3.9 percent at 18.05 pounds.
She described that growth as the “real underlying indicator” for the period, and noted that Burberry’s decision to reduce markdowns in the pre-Christmas period resulted in a “high single-digit negative impact” on comp sales growth.
The no-markdowns strategy is nothing new for Burberry, and has been a pillar of chief executive officer Marco Gobbetti’s strategy for the brand as he looks to cement Burberry in the luxury space.
Burberry said that in the third quarter, full-price sales in leather and outerwear increased in the “low teens,” while digital full-price sales growth was more than 50 percent, with Mainland China delivering sales in the “triple digits.”
The company added that full-price sales growth was driven by new, younger clients as well as repeat customers.
Digital, which generates about 10 percent of Burberry sales, remains a key driver of growth, and Burberry said that online innovations and events fueled more than half of the full-price growth in the channel.
The brand said it continued to use its digital capabilities “to link customers to our stores in periods of limited traffic or lockdowns, including through our new live chat functionality on dot-com, virtual appointments and virtual client events.”
In a flash note following the results, Luca Solca of Bernstein said the current trading environment remains “exceedingly difficult” for companies “in transition.”
“Burberry confirms this today, as it falls short of consensus expectations on like-for-like growth,” Solca said. He pointed out that the brand’s 9 percent decline in comp-store sales was in “stark contrast to what category leaders are producing.”
To wit, Compagnie Financiere Richemont’s third-quarter sales were up, with the jewelry division gaining 14 percent in the period. Overall, Richemont posted a 1 percent rise in sales in the critical pre-Christmas quarter.
Solca added that despite the contraction in Burberry sales, “management nevertheless is expressing confidence on how they are progressing on strategic priorities.”
In Asia-Pacific, Burberry’s comp-store sales increased 11 percent, with full-price sales ahead of the second quarter across the region. Mainland China saw strong double-digit growth, while South Korea continued to perform well with comparable-store sales up mid-teens. Japan and South Asia-Pacific continue to be affected by the limited tourist traffic and pandemic-related store closures.
In the EMEIA region, comparable-store sales fell by 37 percent, due to low tourist demand. The region saw the biggest “swing” in store closures, which moved from 5 percent of stores closed in the second quarter to an average of 19 percent in the third quarter, Burberry said. Continental Europe saw a small increase in domestic customer demand.
In the Americas, comparable store sales fell 8 percent, with full-price revenues up mid-teens, offset by the planned material reduction in markdowns. Full-price sales, Burberry added, continue to be driven by new and younger clients.
COVID-19 isn’t Burberry’s only problem right now.
While Burberry had long been preparing for Brexit, the reality of Britain’s break from the European trade bloc has only just begun to bite.
Brown said new administration costs were in the “low millions” of pounds and described the rules of origin governing trade as “complex, and demanding.”
She said Burberry had already shifted around inventory in the various regions last year in order to minimize cross-border flows of goods between the U.K. and Europe.
The company is also looking into building bonded warehouses, a legal way of avoiding the duty burden of inventory that’s held temporarily in the U.K.
Brown said Burberry was disappointed with the British government’s decision on VAT rebates, which she said could be a “potential detractor” for tourists planning to visit the U.K. She said the company was taking the long-term view, however, and was counting on tourism eventually returning, and flourishing.