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Burberry - sales tumble as 40% of shops close

Sophie Lund-Yates, Equity Analyst | 19 March 2020 | A A A
Burberry - sales tumble as 40% of shops close

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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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In a brief trading update Burberry said it's seen a significant decline in trading since 24 January, with same stores down 40-50%.

The group is taking a number of actions to reduce costs and is operating within its target range of net debt to cash profits.

The shares rose 4.6% in early trading.

View the latest Burberry share price and how to deal

Our view

The closure of stores across Europe and the Americas caused by the coronavirus outbreak has inevitably had knock on effects for sales, and things look set to get worse before they get better.

There are some glimmers of good news though. The balance sheet still looks pretty healthy with plenty of cash and borrowing facilities available, helping the group to weather a downturn. Chinese sales are recovering after stores reopened - although we suspect the bounce back will be slow.

The key question for investors is how long will the current lockdowns last? That's an unknown and the longer this drags on the more permanent the damage will be. The timing is particularly unfortunate for Burberry, because the group was just starting to look like it was turning a corner.

Marco Gobbetti has focused on consolidating Burberry's position at the very top of the value chain. 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.

Long term we think protecting and enhancing Burberry's image is the right call. Burberry's 160+ year old brand is its most valuable asset.

The 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. At the most recent update 75% of all mainline store products were from the newer, ultra-luxe ranges. And although getting there means discounting older stock, margins aren't faring too badly.

What's been particularly impressive is the group's 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. 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. Coronavirus has the ability to undo some of this progress but the group should be well placed to capture demand when footfall recovers.

A sizeable cash pile and historically high margins has historically allowed the group to be pretty generous when it comes to shareholders returns. However, the coronavirus outbreak will call that into question. Analysts are currently forecasting a prospective yield of 4.2% over the next 12 months. That looks sustainable in the short term to us, but as the current crisis continues the squeeze on cash will grow and management may well decide that cash is needed more urgently elsewhere.

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Full Year Trading Update

While trading in Mainland China has started to improve as stores reopen, sales in Europe, the Middle East, India and Africa (EMEIA) and the Americas have declined in recent weeks.

Over 60% of EMEIA stores and 85% of America's stores are currently closed with those still open operating reduced hours. In total, around 40% of stores globally are closed, and the group expects further closures to come.

As a result of closures and falling footfall the group now expects sales in the last few weeks of the year to be down 70-80%, with Q4 sales down 30%. Burberry is looking to renegotiate rents, restrict travel and reduce discretionary spending to limit costs.

The group has access to £0.6bn of cash on hand and a £0.3bn revolving credit facility.

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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.