Burberry, the leading UK luxury goods brand, has released a Q3 trading statement which reveals that whilst sales overall have not recovered to quite the extent management had budgeted for, they have seen a return to sales growth in the important Chinese market. Profits are still seen in line with expectations, due to lower than budgeted performance-related pay awards looking likely, cost reductions and favourable FX movements.
Burberry's shares rose over 2% on the news.
Retail sales rose 1%, driven by new space. Comparable sales were flat, better than the -4% seen in the previous quarter, but held back by Hong Kong and Macau; the former saw sales reductions of over 20%. Korea returned to growth and the immature Japanese business delivered around 50% sales growth.
In Europe, Spain and Italy recovered strongly, but France slowed and the key UK market, which accounts for over a third of regional sales suffered from fewer travelling Chinese and Middle Eastern visitors. The Americas were marginally ahead, with improved local sales offset by weak tourist revenues.
Burberry expect modest growth in retail selling area for the full year, with wholesale revenues in H2 similar to the previous year. Currencies are now seen adding around £10m more to profit than was expected at the interims. Licencing revenues will grow at double digits outside of Japan, but the ending of that important licence will mean overall licensing revenues will be down around 40% in constant currency.
We like Burberry for its robust balance sheet and its successful evolution from British manufacturer of iconic trench coats to a global luxury brand. Longer term performance has been excellent, but the current slowdown in Chinese demand has caused weakness in the share price, since a peak of over 1870p in February 2015.
The store estate is still modest, trading from approaching 220 own stores, plus 218 concessions in department stores, 59 franchise stores and 57 outlets globally, leaving plenty of scope to expand the retail business, as and when the right sites come up.
The range is still growing, with Beauty a big push at the moment, initially through Fragrances, but backed up by an increasing make-up offer, creating scope for mini-stores in niche locations, to complement the core fashion-led stores.
Margins are strong; the group reported 20% operating margins last year. Taking the fragrance offer back in-house will dilute near term, but ultimately should see profits rise. Analysts expect this to lead to a growing cash balance, with consensus forecasts suggesting a steady rise towards a billion pounds of net cash in the years ahead.
Luxury consumers are not risk-free clients, but they tend to be resilient, because wealth is typically more durable than income. But trading conditions are still tough and Burberry seem to have a particular problem in Hong Kong and are suffering from the wider reluctance of Chinese tourists to spend like they used to.
Burberry shares currently trade on a PE ratio of 15.7x for the Mar 2016 financial year, around 15% below their long term average rating. The consensus yield, at 3.15%, is below the market average, but consensus forecasts suggest dividend growth will accelerate after a modest increase in the current financial year.
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