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Burberry - revenue and profit down but trends better

Sophie Lund-Yates, Equity Analyst | 12 November 2020 | A A A
Burberry - revenue and profit down but trends better

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Burberry Group plc Ordinary Shs 0.05

Sell: 1,793.50 | Buy: 1,794.00 | Change 0.00 (0.00%)
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Half year revenue fell 30% to £878m, ignoring the impact of exchange rates. That reflects a 25% reduction in comparable store sales, although trends were much better in the second quarter compared to the first. Operating costs fell at a slower rate than sales declined, meaning underlying operating profit fell 71% to £51m.

Burberry has decided to reduce the amount of markdown stock, which will affect revenue in the second half of the year. New lockdown restrictions in Europe mean more than 10% of stores are currently closed.

The shares rose 4.1% following the announcement.

View the latest Burberry share price and how to deal

Our view

We're encouraged by the positive trends being seen in Q2 - namely, the double-digit rebound in sales in Mainland China, Korea and the US.

It's also nice to hear the group's been able to attract new and younger customers. Heading into these results we'd been concerned products had failed to resonate, with a pandemic putting people off splurging on Burberry's collections - especially with the all-important shop fronts closed for a chunk of the period.

Getting the fashion right is particularly important for Burberry at the moment, since it's throwing a lot of money at a strategic turnaround.

Marco Gobbetti has focused on consolidating Burberry's position at the very top of the value chain. The plan calls for a review of how products are sold, including cutting ties with non-luxury partners. The obligatory restructuring (with accompanying cost savings) makes an appearance too, while digital channels and stores themselves are also getting some serious TLC.

Limiting the number of sales stickers that appear could hurt revenue in the short-term. However, the 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.

There are some considerable challenges remaining though.

Luxury fashion is heavily reliant on tourism spending, and the lack of international travel has hit revenues hard. Although global sales have recovered a bit, thanks in part to a corresponding increase in domestic spending, it's likely to be a while before people are filling airport terminals.

Then there's also lockdown 2.0 to contend with across much of Europe. These have so far been limited in number, but if we continue to see successive waves of the virus, or they were to continue for any length of time, the need to conserve cash could endanger the turnaround plan.

Fortunately the group's balance sheet is formidable, with £542.1m of net cash towards the end of September (if you don't count lease obligations). That hasn't stopped it cutting the dividend, but it does mean management have the firepower to weather a crisis while still investing in a turnaround plan showing early signs of progress.

Overall we think Burberry is well placed - a strong brand and mountain of cash is a powerful combination. However, a lot still rests on whether the group can boost sales, margins and ultimately profits in the longer term. In the nearer-term, the extent of the damage to both ends of the income statement will depend on the duration of new lockdowns, and the speed at which tourism recovers.

Burberry key facts

  • Price/Earnings ratio: 26.8
  • 10 year average Price/Earnings ratio: 20.1
  • Prospective dividend yield (next 12 months): 2.0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half year results (at constant currency unless otherwise stated)

Comparable sales in the first quarter fell 45%, largely due to store closures, but the decline had moderated to -6% in Q2. The latter quarter saw double digit sales growth in Mainland China, Korea and the US. Reduced tourism affected sales in the half, with tourists making up 4% of full price sales compared to 28% this time last year. Online sales grew by high double digits.

Within the Asia Pacific region, revenue fell 11% to £439m, despite strong improvements in Mainland China and Korea. Weak trading in Hong Kong, subdued tourism in Japan and store closures in Australia all held performance back. For the region as a whole, comparable sales were flat.

In Europe, Middle East and Africa, comparable sales fell 56% reflecting a -74% and -39% split in Q1 and Q2 respectively. Revenue fell 48% to £251m. The region was particularly affected by travel trends - tourists typically make up about 50% of sales. Local spend increased in continental Europe, London and the Middle East.

The Americas saw the biggest recovery in comparable sales as stores re-opened, although these were still down 28% for the half. Online growth was very strong, especially in the second quarter. Revenue fell 35% to £170m.

New store openings were cancelled out by an equal number of closures in the period. 29 stores out of 38 have now been closed, relating to Burberry's new strategy and rationalisation efforts.

Wholesale revenue fell 38%, as Burberry reduced the amount of available inventory, to reduce excess stock and third party discounting. Licencing (33% of underlying operating profit) revenue fell 24%.

The underlying operating profit margin fell to 5.8% from 15.9%, and operating costs fell by 17%.

The group reported a free cash outflow of £45m (£29m in 2019), reflecting lower profits and changes to working capital. Net debt, including lease debt, was £550m compared to £538m at the end of March. Net debt as a proportion of cash profits remains in line with Burberry's target range, but is at the higher end.

A decision to resume dividends will be made at the end of this financial year.

Find out more about Burberry shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 for more information.

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