DK88 bag and splurging luxury shoppers boost Burberry in tough times

By

Sandra Halliday

Published
Jul 12, 2017

Burberry has faced some challenging times in recent periods but a trading statement Wednesday showed that it seems to be back on track even though it hasn’t yet delivered a knockout blow in its fight back to full health.

In the update the company talked about strong growth in leathergoods sales, about its top-spending customers being back in force, about mobile making up a massive chunk of online sales and about China seeing a recovery, as well as its ability to deliver £50 million of cost savings in the current fiscal year.

All great news, of course. But Q1 wasn’t without its downsides as the luxury giant said the US remains a big challenge, as do parts of Europe and the Middle East, and footfall in some regions has weakened. There was also a suggestion that UK growth is slowing.

But overall, the picture it painted was a much rosier one than in some recent updates and with its overall figures being positive, it might dampen some investor complaints about excessive executive pay and help add some lustre to Christopher Bailey’s time as CEO.

Newly-in-place CEO Marco Gobbetti didn’t have a great deal to say but did admit that while he was pleased with the Q1 performance he was “mindful of the work still to do” in “a time of great change for Burberry and the wider luxury industry.”

There’s no denying this low-key stance was the right approach to take as a deeper dive into the trading update shows that there’s plenty to be pleased about but that there are also still areas that need to be improved.

DOWN TO DETAILS

So, what actually happened in Q1? The company said that in the three months to June 30, retail revenue on an underlying basis grew 3% year-on-year to £478 million, although it rose 13% on an actual basis as foreign exchange effects boosted takings. Comparable sales rose a healthy 4%.

Burberry was very busy during the quarter as it continued to reduce the number of its SKUs (by May they were down 10% year-on-year). And this strategy seems to be working with the company saying leathergoods rose in a mid-teens percentage. It also said that “fashion and innovation” led its growth overall and that newness in outerwear helped. It’s certainly getting plenty of attention for its fashion offer whether that’s its see now, buy now collections that are shown during main season fashion weeks or initiatives like its recent collaboration with Gosha Rubchinskiy.

Regionally, its performance remains mixed. The brand’s strength in Mainland China drove improved growth in Asia Pacific. The company’s sales grew in a mid single-digit percentage there with Hong Kong continuing to improve (although the lack of specific figures here suggests it remains less buoyant than the company would like). Korea also remained challenging “impacted by the macro environment”.

A booming UK market, which has benefitted from the weak pound, spearheaded the EMEIA region where growth was a high single-digit percentage. However, there was a slightly worrying note as Burberry said it saw “a deceleration towards the end of the quarter,” which is something analysts might want to hear more about later.

And there was weakness in some areas of Continental Europe such as Italy, while the Middle East remained challenging, with the firm repeating its comment about it being “impacted by the macro environment”.

The Americas, the major market that is proving a big challenge both for European and local luxury brands at present, continued to be a problem. It delivered a low single-digit percentage decline. But the firm said conversion in the US continued to improve. It benefitted from a successful BPC (Burberry Private Clients) programme that partially mitigated negative footfall trends and also suggested that those high-spending ultra-affluent customers are becoming ever more important to the business.

While the relative strength of the US dollar drove a strong increase in sales from US customers abroad, demand at home (both tourist and domestic) was lower.

Looking at retail in general, Burberry was a little cautious, saying that footfall “remained challenging”. But even if footfall was an issue, this was offset “by conversion up year-on-year” and those “returning top customers” who helped its figures turn positive overall.

And footfall (or ‘virtual’ footfall) was certainly not a problem in its e-commerce ops. E-tail continued to be a strong point with direct-to-consumer continuing its growth (but we weren’t told by how much) and mobile now 40% of the mix.
In this area, China revenues more than doubled compared to the prior year and the firm’s WeChat reach tripled through its key influencer campaign behind its popular new bag the DK88. Following its successful soft-launch in the UK last year, the customer App is now live in five markets.

OUTLOOK

All of this leaves the company cautiously upbeat with an emphasis on the word caution. For a start, it doesn’t appear to have any ambitious store opening plans for this financial year and “will focus on productivity from its current store footprint”.

On the wholesale and licensing front, the first half should be fairly stable but H2 will be impacted by the move of the firm’s directly-managed beauty business to a licensed deal with Coty.

The company is sticking with earlier pre-tax profits guidance but said that current exchange rates would mean a lower adverse effect than it estimated a few months ago.