LONDON — Burberry stopped short of issuing a sales and profit warning last Friday, but now Morgan Stanley has done it for them.
On Tuesday the bank wrote a research note that Burberry’s comments about the impact of the coronavirus “might imply” a downgrade to 2019-20 earnings in the region of 5 percent.
The bank pointed out that Burberry is the soft luxury company with the highest retail sales exposure to Chinese nationals, and was the first of its peers to issue an official warning about the material impact of the coronavirus on its operations in mainland China and Hong Kong.
Some 40 percent of Burberry’s sales come from Chinese customers buying both at home and abroad.
Burberry added that the spending patterns of Chinese customers in Europe and other tourist destinations have been less impacted to date, “but given widening travel restrictions, we anticipate these to worsen over the coming weeks.”
Morgan Stanley is assuming the ongoing disruption will cause a 50 percent to 60 percent drop in Burberry’s sales to Chinese nationals over the coming two months. (Burberry’s fiscal year ends on March 31.)
The bank said the sales drop would result in an approximate 3 percent reduction to its own full-year sales estimates for the brand. Those figures do not take into account Burberry’s wholesale business.
It added that Burberry’s operating profit could see up to a 10 percent drop in the second half of the year, implying “a mid-single-digit downgrade to FY20 earnings,” which is how it got to the 5 percent.
Morgan Stanley said it would expect Burberry to recover part of that lost sales growth in fiscal 2020-21, “assuming the impact from the outbreak is temporary, and the situation normalizes by April.”
The bank was quick to add that should the drop in sales be more severe than its 50 percent to 60 percent assumption, or should the impact on sales last longer than just two months, “earnings could see a more meaningful cut.”
It also said that with regard to the impact of the virus, Burberry stands apart from its peers.
“While this upcoming headwind was largely expected by the market, particularly after similar warnings from other brands (such as Nike and Pandora), interestingly the luxury sector has so far proved to be particularly resilient from a share price performance perspective,” the bank wrote. “Investors are seemingly looking past these imminent downgrades, which are not expected to affect the solid, underlying, structural growth drivers of the sector.”
Given Burberry’s ongoing turnaround, the bank warned that the British brand might be seen by the market as slightly more vulnerable compared to other more established companies such as LVMH Moët Hennessy Louis Vuitton, Hermès and Kering, particularly given that the virus outbreak will delay the inflection point in Burberry’s sales and profits growth expected over the coming couple of quarters.