LONDON — Jittery tourists, unseasonably warm weather and declining sales in Hong Kong and Macau stung two of the luxury industry’s biggest names, while the Mainland Chinese consumer made a surprise comeback in the key third quarter.
This story first appeared in the January 15, 2016 issue of WWD. Subscribe Today.
Burberry Group and Compagnie Financière Richemont both flagged uneven tourist patterns as a drag on sales in the third quarter on Wednesday, near the time when a shopping area in Jakarta, Indonesia, was attacked by terrorists leaving at least seven dead. Earlier this week a suicide bomber killed 10 people, most of them German tourists, in central Istanbul, near the Blue Mosque, a popular attraction.
International travel warnings remain in place, with an alert for U.S. citizens lasting until Feb. 24. French fashion’s governing body said it was working with police to step up security ahead of the upcoming men’s wear and couture shows later this month.
Burberry said in its trading statement that third-quarter results fell short of internal expectations, remaining flat at reported rates and increasing 1 percent on an underlying basis. Sales in the October to December period were 603 million pounds, or $917 million at average exchange for the period in question, in what chief creative and chief executive officer Christopher Bailey called “a tougher environment than expected” for the luxury sector as a whole.
The company attributed its shortfall to the repeated devaluation of the yuan, the warm winter weather, political instability in the Middle East, and “uncertain” tourist patterns developing since the November terrorist attacks in Paris. Burberry saw a decline in sales following the atrocity, which left 130 dead and hundreds injured, and Carol Fairweather, Burberry’s chief financial officer, added that it “affected sentiment generally, and in terms of tourism.”
Richemont, with its core business in very high-end watches and jewelry, saw sales increase 3 percent on a reported basis, and decrease 4 percent in constant currencies for the quarter.
Both companies pointed to a revival in domestic Mainland Chinese consumption, and the continued shrinkage of business in Hong Kong and Macau. Once glittering, high-margin markets for both brands, Hong Kong and Macau have lost their luster due to political troubles and a decline in Mainland Chinese tourism.
During a conference call, Burberry’s Fairweather said accessories had been more resilient than apparel against the tougher macroeconomic backdrop, with the brand’s new rucksack, Banner bag, small leather goods and scarves all performing strongly alongside ponchos, dresses and the new, lightweight cashmere trench.
Fairweather called the contracting business in Hong Kong and Macau “severely damaging” to the company’s third-quarter results. She also noted that Burberry’s stores in Hong Kong, however, remain profitable and that the brand is taking steps to manage its costs as it works on getting customers through the door and spending on big-ticket items.
The Europe, Middle East and Africa region saw midsingle-digit growth with strong performance in Italy, Spain and Germany, which Fairweather attributed to a combination of tourists and a return to growth among domestic, continental European customers. Italy and Spain continued to deliver growth in excess of 20 percent, while France slowed.
The U.K., which accounts for more than one-third of the region’s retail revenue, became more challenging the company said, with a slowdown from traveling customers, primarily from China and the Middle East. The trend is most likely related to the strength of the pound compared with the euro.
Burberry said the growth in Mainland China came from a combination of increased footfall and conversion rates, helping to offset a comparable sales decline in Hong Kong that was more than 20 percent. Fairweather said the growth in Mainland China was also underpinned by the brand’s holiday program, which featured a marketing film based on “Billy Elliot,” and starring the likes of Sir Elton John, Naomi Campbell, James Corden and Rosie Huntington-Whiteley.
Richemont said trading in the Asia-Pacific region continued to be challenging. It said the rate of sales growth continued to improve in Mainland China, where Hong Kong and Macau both reported significantly lower sales.
The firm’s European growth was tarnished by the Paris terrorist attacks: Compared to the first six months of the current year, the company said the slowdown in third-quarter sales “largely reflected weak trading in Europe,” due to lower levels of tourism.
Third-quarter revenues at the parents of brands including Cartier, Van Cleef & Arpels, Panerai and Dunhill totaled 2.93 billion euros, or $3.21 billion.
Jewelry continued to enjoy growth across most regions and product categories, partly compensating for weak demand for watches.
Sales in the Americas region continued to be subdued, while growth in Japan pressed on, albeit at a lower rate, than during the first six months, largely due to increasingly challenging comparatives and seasonal factors, in particular Chinese tourism, Richemont said.
The Middle East and Africa continued to show limited growth.
Looking ahead, both Richemont and Burberry conceded that the challenging trading environment is likely to prevail in the final quarter, ending March 31.
Richemont noted that its operating profit for the year as a whole will also be negatively affected on a comparative basis by a non-recurring property disposal gain, while net profit for the year will benefit on a comparative basis from the non-cash gain relating to the creation of Yoox Net-a-porter Group.
Burberry, meanwhile, said it expects adjusted profit before tax for the full year ending March 31 to be broadly in line with market forecasts, and supported by a further reduction in management bonuses, additional discretionary cost savings, and a boost from foreign exchange rates.
Fairweather said that during the last few months Burberry had identified a further 5 million pounds, or $7.2 million, in savings, in addition to the 20 million pounds, or $29 million, already announced.
All currency conversions are at average exchange rates for the periods in question.