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Burberry - first half revenue and profits up

Burberry's first half revenue rose 5% to £1.3bn, ignoring the effect of exchange rates...

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Burberry's first half revenue rose 5% to £1.3bn, ignoring the effect of exchange rates. That reflected strong growth in Leather Goods. On a comparable store basis, sales were up 5%. Comparable growth was entirely driven by Europe, Middle East, India and Africa. Despite ongoing investment in the brand and marketing, underlying operating profit rose 6% to £238m.

The group unveiled a new strategy, which includes aiming to grow accessories to 50% of group sales in the long-term and to double the sales of leather goods and women's ready-to-wear in the medium term. Burberry plans to convert all stores to the new concept by the end of the 2026 financial year.

Free cash flow fell to £88m from £104m, partly reflecting the effect of increased inventory in the run up to Christmas. Net debt was £496m at the start of October, equivalent to 0.6 times underlying cash profit.

Looking ahead, Burberry's on-track to meet its 2024 guidance, but remains mindful of the difficult economic conditions in its core markets.

An interim dividend of 16.5p was announced, up 42%.

The shares were unmoved following the announcement.

View the latest Burberry share price and how to deal

Our view

A successful strategic pivot in the rear view mirror means it's time to look to the future. Ex-Gianni Versace leader Jonathan Akeroyd now has the big task of injecting a bit more life into overall sales, over the longer term.

Recent performance has been buoyed by American tourists spending big in Europe, as they take advantage of the strong dollar. This is a helpful tailwind but not one that can be relied on forever. Future-proofing revenue and hitting lofty targets like doubling the sale of leather goods in the medium term will need a lot more than favourable exchange rates.

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 doing well.

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 higher end of 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. No dividend is ever guaranteed.

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. Uncertainty's reflected in the price to earnings ratio which is a little way below the ten year average.

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.

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: 17th November 2022