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Burberry - Coronavirus impacting sales

Sophie Lund-Yates, Equity Analyst | 7 February 2020 | A A A
Burberry - Coronavirus impacting sales

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Burberry Group plc Ordinary Shs 0.05

Sell: 1,498.00 | Buy: 1,500.50 | Change -88.00 (-5.56%)
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CEO Marco Gobetti said in a statement "the coronavirus in Mainland China is having a material negative effect on luxury demand." 24 of Burberry's 64 mainland China stores are closed, with the rest operating with reduced hours. Stores in both Mainland China and Hong Kong are seeing significant reductions in customer footfall.

Travel restrictions means Chinese customer tourist spending is also expected to weaken. The group's making efforts to offset these headwinds, but the benefits won't be fully felt this financial year, which ends in March.

Burberry said it can't predict how long this situation will last, but remains confident in its strategy.

The shares fell 3.12% following the announcement.

View the latest Burberry share price and how to deal

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 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. The Coronavirus has the ability to undo some of this progress in the short term, but this is largely outside Burberry's control. Plans are in place to mitigate the impact, and the group's continuing with its strategy, so it should be well placed to capture demand when footfall recovers. For now, it's too early to call what the exact impact of the virus will be.

In general, 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 2.4% 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 (22 January 2020)

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.

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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