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Burberry - sales upgrade despite Hong Kong disruption

Nicholas Hyett | 22 January 2020 | A A A
Burberry - sales upgrade despite Hong Kong disruption

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Burberry Group plc Ordinary Shs 0.05

Sell: 1,514.50 | Buy: 1,515.50 | Change -68.50 (-4.33%)
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Burberry reported sales of £719m during the 13 weeks to the end of December, 2% ahead of the previous year once currency movements are excluded. That reflects a 3% increase in like-for-like sales, with an increase in full price sales, partially offset by disruption in Hong Kong.

Full year revenue is now expected to grow by low single digits, compared to previous guidance for broadly stable sales, with operating margins flat year-on-year.

The shares fell 2.7% in early trading.

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Our view

Marco Gobbetti is focused on consolidating Burberry's position at the very top of the value chain. That's required some tough decisions, but the results are starting to show.

The plan calls for a review of where and how products are sold, including cutting ties with non-luxury partners. Digital channels and stores themselves are also getting some serious TLC. Store closures and increased costs are obviously a risk, but we think protecting and enhancing Burberry's image is the right call for the long term. Burberry's 160+ year old brand is its most valuable asset.

Burberry's new look leans heavily on the creative prowess of Chief Creative Officer, Riccardo Tisci. He's a relative newbie, having joined Burberry from Givenchy, but his designs seem to be paying dividends. 75% of all mainline store products are now from the newer, ultra-luxe ranges. And although getting there means discounting older stock, margins aren't faring too badly.

What's particularly impressive is the continued growth in Asia, despite political unrest in Hong Kong, and after trade wars threatened to bring a Chinese government crackdown on the luxury goods market.

Tapping into the Chinese nouveau riche is crucial for Burberry. In total, Asia Pacific accounted for £1.1bn of sales last year, 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 is pretty flush, with £670m of net cash sitting on the balance sheet at the half year. We'd rather the group found a productive use for that, but it does mean the 2.1% prospective dividend yield should be able to grow even as the group completes a sizeable share buyback. As ever there are no guarantees though.

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Third quarter results

Third quarter growth was driven by the Europe, Middle East, India and Africa (EMEIA) region, where sales rose by a high single digit percentage. Tourist spend in continental Europe was particularly strong. Asia Pacific sales rose by a low single digit percentages, as mid-teens growth in Mainland China was offset by sales in Hong Kong falling by 50%.

New product from Riccardo Tisci's collections now accounts for 75% of stock in Burberry's mainline stores, and is being well received. The group has remained focused on Chinese consumers, with marketing campaigns targeting the Lunar New Year, plans to take the runway show to Shanghai, and a first social retail store to launch in Shenzen.

Store refreshes continue, with 16 smaller, non-strategic stores shut and 60 refurbishments completed. Non-luxury wholesale distribution is also being reduced.

Annualised cost saving are coming in slightly ahead of previous guidance at £125m.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.