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Burberry - full year revenue hurt by Covid-19, no final dividend

Sophie Lund-Yates, Equity Analyst | 22 May 2020 | A A A
Burberry - full year revenue hurt by Covid-19, no final dividend

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Burberry Group plc Ordinary Shs 0.05

Sell: 1,717.00 | Buy: 1,718.50 | Change 81.00 (4.94%)
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Burberry's full year revenue fell 4% to £2.6bn, which was slightly better than analysts expected. Lockdowns meant comparable store sales were down as much as 27% in the final quarter, with 60% of retail stores closed in March. Weaker sales fed into underlying operating profit of £433m, a decline of 8%. Including charges to reflect the lower value of the group's inventory and stores following the disruption, operating profit was £189m.

The group is unable to give specific guidance for the rest of the year. 50% of stores are now closed and the first quarter will be severely impacted. In order to keep more cash in the business Burberry won't pay a final dividend, and future dividends will be reviewed at the end of the financial year.

The shares rose 1.8% following the announcement.

View the latest Burberry share price and how to deal

Our view

Lockdown decimated sales and profits in the final quarter of last year. And with half of Burberry's stores still closed, things aren't going to bounce back to normal just yet.

The group is more reliant on international travel than traditional fashion outlets. Asian tourists are an important part of the sales story in other regions. It's going to be a while until travel trends get back on track, so this will act as a drag for some time.

But it's important to look at the bigger picture, which remains positive in our view.

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.

85% of all mainline store products are now from the newer, ultra-luxe ranges. This pivot to the top end of the value chain will be a boost to margins in the long-run, and it's a strategy we admire. And, crucially, Burberry's customers seem to agree.

Trading was actually ahead of expectations before coronavirus hit, which means there's a stronger foundation for the group to build on once the dust starts to settle. The Asia Pacific market is a huge growth opportunity, and it's particularly comforting to see underlying demand was doing well here too. We should also note global recessions are less of a problem for the likes of Burberry - its wealthy customers tend to keep spending regardless of what the economy's doing.

Of course it wouldn't be right to brush Covid-19 challenges to one side. The next few months are going to be challenging. As long as stores are closed, or difficult to travel to, sales are going to struggle to shine. We also hope that the disruption doesn't put the brakes on what has been excellent progress in Burberry's creative transformation. The level of any damage rests on the shoulders of lockdown durations and the group's allocation of cash.

The group has access to over £880m of the paper stuff, as well as low debt levels. While that means we don't have concerns over Burberry's liquidity, investors need to be aware that if conditions sour or sales take too long to stabilise, that stash will diminish quickly. That's why we're supportive of the decision to suspend the dividend.

Overall we think Burberry is well placed to capture demand when the crisis subsides, and a higher-margin model means profits could come along for the ride. But while we're positive for the future, it is unlikely to be a smooth road from here, and there are no guarantees.

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Full year results (at constant currency unless otherwise stated)

Retail like-for-like sales (LFL) were down 3%, reflecting store closures and reduced operating hours in the final quarter. Retail sales of £2.1bn were 4% lower than the prior year. Prior to the outbreak trading had been better than expected.

Within Mainland China LFLs were actually up by mid-teen percentages in the first 9 months of the year, and low single digits for the year as a whole. Overall the Asia Pacific region declined by mid-single digit percentages, including disruption from political unrest in Hong Kong.

In Europe, Middle East and Africa LFLs were flat year-on-year, as strong growth was offset by a decline in travelling consumers and closures from February. The Americas declined by a low single digit percentage, including double-digit declines from Canada and Mexico.

New store openings included new flagship stores in China World Beijing, IFC Shanghai and Ginza Tokyo. 64 stores have now been renovated to Burberry's "new creative vision".

The Wholesale business saw revenue fall 3% to £476m, reflecting COVID-19 related cancelations as well as the closure of non-luxury accounts in the US. Licensing revenue was up 1% to £47m.

The underlying operating profit margin was 16.4%, 0.7 percentage points lower than last year when accounting changes are excluded. The cost saving programme delivered cumulative savings of £125m this year, and £140m is expected to be saved by the end of the year.

The lower profitability and the timing of tax payments meant free cash flow was £66m compared to £301m in 2019. Including lease liabilities net debt was £0.5bn as at 28 March, which is well within the acceptable limits set by the group's lenders. Burberry has access to £887m in cash, including £300m of drawn credit, and is eligible for a further £300m of borrowing from the government's coronavirus lending scheme.

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