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Burberry - Q1 growth stalled by China lockdowns

First quarter comparable store sales rose 1%, as lockdowns in China took their toll. Excluding Mainland China, comparable store sales grew 16%.

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First quarter comparable store sales rose 1%, as lockdowns in China took their toll. Excluding Mainland China, comparable store sales grew 16%. This was driven by higher domestic spending in other regions.

The group's latest collections have been well received, with leather goods and outerwear comparable store sales, excluding Mainland China, rising 21% and 19% respectively. Burberry's on track to add 65 newly designed stores in the 2023 financial year.

Burberry is still expecting high-single digit revenue growth and 20% margins in the medium term, but warned "the current macro-economic environment creates some near-term uncertainty".

The shares fell 5.3% following the announcement.

View the latest Burberry share price and how to deal

Our view

The heavy lifting is over for Burberry's strategic pivot.

Changes included cutting ties with non-luxury partners, reducing outlet activity and stopping in-store discounts. Digital channels and stores themselves are also getting some serious TLC. The pivot has boosted underlying operating margins as full price sales nudge upwards.

Newly minted CEO - ex-Gianni Versace leader Jonathan Akeroyd, now has the big task of injecting a bit more life into overall sales.

Sales were lagging Burberry's luxury peers, so while we've been pleased with the execution of the turnaround, it's now a question of picking up these newly forged tools and using them.

That's a tough ask in the current environment. Mainland China is responsible for a big chunk of revenue, both within its borders, but also from Chinese tourist spending abroad. Performance is being dented by renewed restrictions in China, and a broader weakening of the economic outlook. For as long as demand is subdued in China, Burberry will struggle to meet its potential. That's despite an admirable increase in domestic spending in other regions.

And those increases in alternative regions brings us to the better side of the story. Burberry's efforts to be seen at the top end of luxury fashion has proved a shrewd move. New products and ranges have been well received, with the important categories of Leather Goods and Outerwear growing by double digits outside of China.

Plus, luxury fashion is all about image, and elevating the brand will pay dividends in the form of higher prices and stickier customers. Those luxury customers also help in a different way. With inflation continuing to surge, it's worth remembering luxury customers tend not to be as swayed by economic ups and downs, including when money in the bank is losing its value at a faster rate than normal.

Investment is a key part of reinvigorating the Burberry brand, so investors shouldn't be expecting a total about-turn in bottom line growth just yet.

The group's balance sheet is in reasonable health, with net debt well below the target range of 0.5-1.0 times underlying cash profits (EBITDA). That not only provides the fuel for store and product investment, but means the group is comfortable enough to restart shareholder returns. Dividends are back, and currently at a higher level than pre-pandemic, and the group's announced a share buyback too. If things go to plan those could be extended at the full year but as with all dividends there are no guarantees.

Overall, we're pleased with progress. Given the underlying reaction to new ranges and the uptick in full price sales, we think Burberry's in a good position to boost sales, margins and ultimately profits in the longer term. That said, the short-term is fraught with some real challenges, and we'd like some proof of sustained delivery on sales expansion before popping any champagne.

Burberry key facts

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.

Full Year Results (18 May 2022)

Full year underlying revenue rose 23% to £2.8bn, which was 10% ahead of pre-pandemic levels. This reflected a favourable mix of products sold, and a double-digit rise in comparable store sales, which were up 6% versus 2020.

Underlying operating profits rose 38% to £523m, ahead of expectations, as full priced sales rose 24% year over year.

Burberry announced a final dividend of 35.4p, taking the full year up 11% to 47.0p. The group's also planning a £400m share buyback scheme, due to complete in 2023.

The group expects to perform in line with targets for the medium term, but noted that the impact of Covid on consumer spending in China could create some near-term uncertainty.

Overall comparable store sales were negatively impacted by renewed lockdown restrictions in Asia in the fourth quarter. This meant growth was weighted to the first half. Full price sales saw growth across all product categories.

Comparable store sales in the group's largest geographical region, Asia Pacific, rose 13% with full price sales up 29%. Regional lockdowns impacted performance in Mainland China, but comparable store sales still rose 37%. Limited tourist traffic meant South Asia Pacific and Japan posted declines.

Europe, Middle East, India and Africa saw comparable store sales fall 18% with full price sales down 11%. This was largely due to lower tourist spend which historically made up roughly half of the region's revenue, with continental European customer spend up 30%. The Middle East continued to grow with both domestic and tourist demand on the rise.

Comparable store sales in the Americas increased 28% with full-price sales up 86%. This was driven by full price sales growth in the US, which nearly doubled as new and younger customers adopted the brand.

Overall Retail sales rose 20% year-on-year while Wholesale revenue was up 35% over the same period. Underlying operating profits for the combined Retail/Wholesale division were up 41% year over year to £486m. Licencing saw revenue and adjusted operating profits rise 11% and 10% respectively compared to 2021.

The group competed its efforts to streamline its estate with 35 stores closed over the year and 38 opened. The group redesigned 47 stores over the year and plans to open 65 stores under the new format this year.

Free cash flow declined slightly over the year to £340m, reflecting lower covid-related lease rebates and changes in inventory provisioning. Net debt including leases rose from £101m last year to £179m or 0.2 times underlying cash profits. This is well below the group's target range of 0.5-1.0 times.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 15th July 2022