Burberry

LONDON — Smaller British companies may be suffering its ill effects, but the weaker pound is poised to give Burberry’s year-end profits a much-needed boost of up to 125 million pounds, or $152 million, and has already pumped up second-quarter sales.

Burberry’s sales, which were down 3 percent in the first quarter, turned positive in the three months to Sept. 30, the period that followed Britain’s vote to exit the European Union.

The vote, and the uncertainty it created, sent the pound tumbling against the dollar and euro, spurring tourists and locals alike into a shopping frenzy.

The anticipated currency boost in fiscal 2016-17 failed to lift investors’ spirits, though. Burberry shares tumbled 9 percent on Tuesday to 13.75 pounds, or $16.75 at current exchange.

Second-quarter comparable retail sales were up 2 percent in the three-month period, with the U.K. driving the lion’s share of growth.

Carol Fairweather, Burberry’s chief financial officer, said during a conference call following the company’s first-half trading update that U.K. sales climbed 30 percent in the second quarter, generating 40 percent of growth in the three months.

She attributed the sales uptick to the post-referendum devaluation of the pound, which drove the retail prices of merchandise down for those paying in dollars, euros and yuan.

According to Visit Britain, the national tourism agency, July saw the most overseas visitors to the U.K., with numbers up 2 percent to 3.8 million compared to the same month last year. Their spend climbed 4 percent to 2.5 billion pounds, or $3.3 billion.

Fairweather said Burberry also saw sales growth among its local customer base, which she said was due to the company’s work around the “newness” of product and work with private clients. As part of its new strategy, laid out earlier this year, Burberry said it would focus on cultivating the local clientele and cater more to local tastes and climates.

Asked how much Burberry’s first see-now-buy-now, in-season show contributed to the sales uptick in the second quarter, Fairweather said it didn’t have a great impact.

“We were delighted by the response [to the show] and by the amount of product sold,” she said, adding that the Bridle bag, which made its runway debut in September, was the top-selling item from the collection and is now the brand’s third biggest-selling bag globally.

The company also touted the success of its Buckle bag and the emerging growth of categories such as dresses and ponchos. Fairweather said that fashion items have generally been outperforming replenishment ones on the shop floor.

The impact of the show on sales was small overall, she said, as the event took place less than two weeks before the quarter ended on Sept. 30.

Fairweather said the second-quarter bounce was due more to growth in the U.K. and in Mainland China, which delivered a midsingle-digit percentage comparable sales increase despite the impact of the changing store portfolio in Beijing, Burberry’s largest market in the country.

The strong pound had a halo effect on the first half generally: Revenue in the six months to Sept. 30 was up 5 percent to 1.16 billion pounds, or $1.52 billion, although underlying sales in the period were down 4 percent, due partly to declines in wholesale and licensing.

In the half, retail revenue, which represents 74 percent of the company’s overall sales, was up 11 percent to 859 million pounds, or $1.13 billion, and 2 percent on an underlying basis.

Sales in Asia-Pacific and Europe, the Middle East and Africa, were up on a reported basis and broadly flat on an underlying one, while the Americas region was down on both an underlying and a reported basis.

In the first half, most product categories saw a decline in underlying growth, with the exception of men’s, which was flat, and children’s wear, which was up 9 percent. At reported rates, all categories, except for beauty, grew in the single digits, while children’s wear was up 21 percent.

On an underlying basis, beauty revenue in the half was down 17 percent and at reported rates it fell 7 percent to 76 million pounds, or $99.6 million.

Burberry said the MyBurberry and Mr. Burberry fragrances performed well, with market share gains in key regions. Fairweather added that the decline in the division was due to Burberry’s efforts to refine the business.

She noted that Burberry has downsized its points of sale in the U.K. — its largest market — to 35 from 3,000. “We were massively overdistributed in our home market and part of our strategy for the beauty pillar is to clean up distribution,” she said.

Fairweather insisted the decline in beauty sales was not about the performance of MyBurberry, which has been doing “super well.” She added that Burberry is also working on honing the distribution of its fragrances on the Continent as well.

Wholesale revenue in the half decreased by 14 percent underlying (and 6 percent at reported rates), broadly consistent with guidance. Excluding the beauty division, underlying wholesale revenue in EMEIA and Asia-Pacific was largely unchanged year-on-year.

The Americas saw a “significant decline,” at wholesale Burberry said, principally reflecting tighter inventory control by customers and further strategic brand elevation.

Fairweather said Burberry continues to “elevate” the brand in the U.S. market, and its aim in the half was to avoid building up excess inventory at U.S. department stores — and subsequently being caught up in promotional activity.

She revealed that the decline in U.S. wholesale sales was 25 percent, which Burberry was happy to swallow due to its strategy in the region. She said the company saw a “slight” overall sales improvement in the U.S. in the second quarter.

Looking ahead, Burberry expects total wholesale revenue at constant exchange rates in the six months to March 31 to be down by a midteens percentage on the same period last year, with the trends similar to those in the first half of the current year, due to the company’s planned distribution strategies.

An anticipated decline in licensing income also ate into the first-half revenue figure. Due to the planned expiry of the Japanese Burberry licenses, revenue declined by 54 percent underlying and was down 51 percent at reported rates in the half, consistent with full year guidance. Burberry took its Japanese business in-house last year.

The pound, which has fallen nearly 20 percent against the dollar and recently hit a six and a-half year low against the euro since Britain’s vote to quit the European Union, will prove a further boon to Burberry’s bottom line in fiscal 2016-17.

It will give a needed boost to the company, which is currently restructuring and looking to deliver annualized cost savings of at least 100 million pounds, or $122 million, by fiscal 2019.

Using Sept. 30 exchange rates, Burberry said that reported, adjusted retail/wholesale profit would benefit by about 105 million pounds, or $128 million.

The company added that, given the significant movement in exchange rates since Sept. 30, the benefit of using Oct. 12 rates would be at least 20 million pounds, or $24 million, higher than its September currency estimate.

Analysts at Verdict Retail were bullish about Burberry’s future prospects despite a challenging climate for luxury goods they believe will last into 2017.

“Burberry has many aces up its sleeve, especially in terms of product innovation and customer experience,” wrote Nivindya Sharma, senior analyst at Verdict Retail.

Sharma pointed to Verdict’s own data, which indicates that 85.6 percent of clothing shoppers prefer to buy items they can wear straightaway and added that Burberry’s decision to move to a see-now, buy-now model was a wise one.

Sharma also pointed to the company’s revamp of the burberry.com customer-friendly web site last month, and the arrival next year of Marco Gobbetti as chief executive officer.

“He will bring a fresh structure and direction to the brand, while freeing up Christopher Bailey to do what he does best — innovate and create — keeping Burberry in prime position to weather the storms ahead,” Verdict said.

load comments
blog comments powered by Disqus