Burberry shares jumped 5.3% after the group released a trading update showing Q1 sales around 1.5 percentage points ahead of prior analyst expectations.
Burberry's most recent trading update might show conditions still look tough in a number of markets, but there are some more positive noises creeping in.
After a few years characterised by key Chinese customers tightening the purse strings, the fact the group says its 'top customers' are now returning is welcome news. This gives new CEO Marco Gobbetti some positive momentum to work with.
It remains to be seen whether his tenure will mark a departure from that of Christopher Bailey, who remains Chief Creative Officer. However, the deal with the US cosmetics group Coty to licence out Beauty products, primarily fragrances, marks something of a U-turn. The focus has previously been on promoting Burberry's own stores, rather than selling to third parties. The agreement will take effect from October 2017, and will net the group £130m upfront, plus ongoing regular payments.
Longer 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. This means 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 room for manoeuvre.
The store estate is still relatively modest, with 205 of its own stores, 197 concessions, 48 franchise stores and 59 outlets globally. With the outlook still uncertain, Burberry expects to add limited net new space in the next couple of years, but there is clearly plenty of scope to expand as and when the right sites come up.
The shares offer a prospective yield of 2.6% and trade on 19.4 times expected earnings.
First quarter trading (at constant exchange rates)
Retail revenue rose 3% to £478m, with like-for-like sales up 4%. This growth was driven by a strong performance in mainland China and the UK, with some improvements seen in Hong Kong. However, other markets, including Korea and Italy were weak. In the US, sales conversion improved but footfall trended down as the strong dollar deterred both domestic and tourist shoppers, leading to a low single digit percentage drop in sales.
Digital sales continue to rise, following Burberry's investment in this area. The group's app is now live in 5 countries and mobile represents 40% of the digital sales mix. Mobile sales in China more than doubled year-on-year.
Burberry is particularly pleased with the performance of its DK88 bag and the tropical gabardine trench coat.
The group has completed the remaining £;50m of its initial share buyback programme, and is set to repurchase another £300m of shares over FY 2018. Looking ahead, there is no change to previous profit guidance, although foreign exchange headwinds are expected to lessen slightly. Burberry is also now expecting the Coty licencing deal to result in less disruption to its Beauty division than it had previously anticipated.
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