CEO Marco Gobbetti has described Burberry's first quarter a good one in the multi-year transformation, with an encouraging reaction to the collections from new creative director Riccardo Tisci.
The shares moved 8.5% higher after the announcement.
Marco Gobbetti is focused on consolidating Burberry's position at the very top of the value chain. That will take time, but the potential rewards are considerable.
The transition involves reviewing where and how its products are sold. Digital will get more investment, while Burberry's physical stores are getting a refurb to maintain that premium image. The group's also cutting ties with several non-luxury wholesale partners.
That means sales and profits are being forfeited in the short term, so Burberry is taking a bit of a gamble. However, Gobbetti clearly thinks selling in sub-optimal conditions and potentially diluting the premium image is the greater risk.
We empathise with his view. In fashion, appearances matter, and Burberry's 160+ year old brand is a very valuable asset. In the UK the group is only just shaking the 'football hooligan' image it acquired in the early noughties.
The plan relies heavily on the creative prowess of Chief Creative Officer, Riccardo Tisci. He's not been at Burberry for long, although his initial collection looks promising.
Sales in the first quarter were ahead of market expectations, and it was particularly encouraging to see such strong growth in Asia after trade wars threatened to bring a Chinese government crackdown on the luxury goods market.
Tapping into to the Chinese nouveau riche is crucial for Burberry. In total, Asia Pacific accounts for £1.1bn of sales, and over time, we'd expect the luxury market in the Far East to grow faster than in more developed geographies. That should be a long-term positive, but investors should remember these markets can be volatile.
Overall, we like Burberry. Management has shown a willingness to grasp the nettle and do the right thing for the long term. And with luxury consumers prepared to pay handsomely for that special item, high margins and impressive cash generation are both possible.
Like many of its regular customers, Burberry has an impressive cash hoard. A hefty buyback programme is eating into it a bit, but there's still well over £800m sitting on the balance sheet. We'd rather the group found a productive way to deploy the cash but it does mean the dividend, which offers a prospective yield of 2.2% next year, should be able to grow - but as ever there are no guarantees.
First quarter trading update
Like-for-like Retail sales rose 4%, which more than offset the impact of a 2% reduction in sales space from the ongoing non-core closure program. As a result, revenue rose 2% at constant exchange rates to £498m.
Underlying sales rose by a high single digit percentage in the Asia Pacific region, driven by a mid-teen percentage increase from mainland China.
In EMEIA (Europe, Middle East, India and Africa) sales rose by a low-single digit percentage, boosted by good tourist spending in the UK.
Underlying trends in the Americas were flat, as the US grew by a low-single digit percentage but Canada was negatively impacted the timing of markdowns.
The group has maintained its guidance for broadly stable revenue and operating profits, before accounting for currency moves, underpinned by £120m of cumulative cost savings. As previously confirmed, profits are expected to be weighted more to the second half.
The author holds shares in Burberry.
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