LONDON — The currency hurricane that has damaged European luxury companies’ earnings is tailing off, and the second half looks decidedly brighter for the sector’s firms.
This story first appeared in the November 13, 2014 issue of WWD. Subscribe Today.
On Wednesday, Burberry signaled that the worst of its currency woes have passed and that its reported second-half numbers won’t be as badly damaged by exchange-rate fluctuations as those of the first half.
Carol Fairweather, Burberry’s chief financial officer, said during an analysts’ presentation on Wednesday that if exchange rates remain at early-November levels, “we do not expect a material foreign exchange impact in the second half of the year. Headwinds are moderating, and we’re expecting around a 10-million-pound [$16-million at current exchange] adverse effect in the second half.”
Fairweather added that the company is expecting a 35-million-pound, or $55.5 million, currency hit to its 2014-15 profits. In the full year, margins also will feel pressure from what Burberry has called “a more difficult external environment” and continued investment in new stores.
On Wednesday, Burberry shares closed down 1.5 percent to 15.05 pounds, or $23.87, on the London Stock Exchange.
Currency headwinds have been a persistent headache for Europe’s luxury goods firms that do the bulk of their business outside the region yet report quarterly results in their strong home currencies.
There is little these companies can do to counteract the cost of translating their sales and profits into their strong home currencies. “We can hedge procurements and we can hedge cash flow, but we cannot hedge profit translation,” said Fairweather on Wednesday.
Burberry said the adverse impact of exchange-rate movements in the six months from April to September reduced reported profit by 25 million pounds, or $42 million, and reported revenue by 69 million pounds, or $115.9 million in the six months to Sept. 30.
All figures have been converted to dollars at average exchange rate for the periods to which they refer.
The tide, however, has begun to turn. With the U.S. economy gaining momentum and Europe’s economic recovery stalling, the dollar has rapidly begun to rise in value against the euro and the pound.
Burberry isn’t the only company to feel the change: Last Friday, Gary Saage, chief financial officer at Compagnie Financière Richemont, said the stronger dollar was beginning to work in favor of the Swiss luxury goods group, which reports its earnings in euros. “Up until August, exchange rates were against us, but in September they turned positive, and they were positive in October, too. There may be good times ahead,” he said.
In the first half, the currency storm battered Burberry’s bottom line, transforming an underlying 6 percent gain in adjusted profit before taxation into a reported 12 percent loss in the six months to Sept. 30. Adjusted profit before taxation was 152.3 million pounds, or $255.9 million.
Net profit sank 6.9 percent to 108.4 million pounds, or $182.1 million, on the back of a reported 6.7 percent uptick in revenue to 1.1 billion pounds, or $1.85 billion. Burberry, which reported its revenue figures last month, said growth was spread evenly across all geographic regions and major product categories.
The company added that its interim dividend rose 10 percent to 9.7 pence, or 16 cents, which Burberry said reflected its intention to move incrementally to a 50 percent dividend payout ratio.
In Wednesday’s statement, Burberry also flagged a one-off beauty inventory cost that cut into its gross margin for the period. Fairweather said the cost was linked to the launch of Brit Rhythm for Women in January.
The company was left with excess inventory and point-of-sale material; at the time, Burberry did not have the proper “visibility” to solve the problem, Fairweather said, adding that the issue has since been ironed out.
For the full fiscal year, which ends in March, Burberry is still expecting beauty wholesale revenue to grow by about 25 percent at constant exchange rates.