Burberry's half year results were strong, with like-for-like sales marginally ahead of market expectations, and profit forecasts slightly upgraded for the current year. However, results were also accompanied by a strategic update from new CEO Marco Gobbetti. Revenue and margins are expected to remain level for the next two years, as Burberry reshapes its offer. The shares dropped 11.1% on the news.
The interim dividend increases 5% to 11p per share.
The market may not like the fact the new CEO's plans mean revenue and profits looks set to flat line for the next couple of years, but we can see the rationale.
In short, the group is focused on consolidating its position at the very top of the value chain. Part of this involves reviewing where and how its products are sold. Digital outlets will get even more investment, while Burberry's physical stores are getting a refurb to maintain that premium image. Perhaps of most interest is the decision to cut ties with several non-luxury partners that offer its products on a wholesale basis.
This withdrawal means potential sales and profits are being forfeit, so Burberry is taking a bit of a gamble. However, Mr Gobbetti has clearly come to the conclusion that selling in non-optimum conditions, and thus potentially diluting the premium image, is the greater risk.
We have some sympathy for this view. In fashion at least, appearances matter, and Burberry's 161 year old brand is arguably its most valuable asset. The group is clearly mindful of the old adage that it takes years to build a reputation, and minutes to lose it.
As far as current trading goes, conditions have been difficult, but there are some more positive noises creeping in. After a few years characterised by key Chinese customers tightening the purse strings, the group says its 'top customers' are now returning.
In the long-term, Burberry should have plenty of tailwinds. It is well-placed to profit from increasing affluence in the Far East, while luxury consumers are usually prepared to pay handsomely for that special item. Consequently, high margins and impressive cash generation are both possible. The group has a strong balance sheet too, and its net cash position of over £800m gives it plenty of options to expand, as and when the time is right.
Prior to the price move, the shares offered a prospective yield of 2.1% and trade on 23.4 times expected earnings.
First half results
Revenues rose 4% to £1.3bn, driven by improving same store sales. Burberry says sales were particularly strong in 'rainwear' and leather goods.
With adjusted operating margins rising 2.1 percentage points to 14.6%, as costs shifted between halves and profitability in Beauty improved. This helped adjusted operating profit rise 17% to £185m.
Asia Pacific, £461m of total sales, delivered mid-single digit growth, driven by mainland China. Hong Kong continues to improve, but difficult conditions in Korea resulted in declines there.
In the Americas, revenues dropped slightly to £292m as domestic and tourist revenues both remained negative.
Across the rest of the world, Burberry saw mid-single digit revenue growth, taking sales to £500.7m. France and Germany improved, while the UK dipped as the group lapped the strong uptick seen last year.
Burberry expects to deliver £60m of cumulative cost savings this year, £100m in FY 2019 and £120m annualised in FY 2020.
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