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Burberry - profit downgrade on lower demand

Burberry released an early trading update for the 13 weeks to 30 December 2023, with revenue down 2% to £706mn when ignoring exchange rates...

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Burberry released an early trading update for the 13 weeks to 30 December 2023, with revenue down 2% to £706mn when ignoring exchange rates. Sales fell in EMEIA (Europe, the Middle East, India and Africa) and the Americas, 5% and 15% respectively. That was partly offset by growth of 3% in Asia Pacific.

Given a drop in luxury demand and weak December trading, full-year underlying operating profit is now expected to be between £410-£460mn (vs. consensus of £522mn). The group remains confident it can hit its medium-term £4bn revenue target.

The shares fell 7.3% in early trading.

View the latest Burberry share price and how to deal

Our view

Burberry continues to struggle with demand, and releasing its third-quarter trading statement early to issue a profit warning wasn't received well. So-called aspirational shoppers are one of the demographics pulling back, and Burberry is more exposed to this type of customer than super-high end luxury.

There's particular weakness in the US, where consumers have been running down their savings amid a higher interest rate and inflation environment. Growth is also slowing in Asia following tougher comparisons.

Burberry is in a hostile trading environment, but that doesn't mean hope is lost. In fact, we've been pleased with underlying progress.

The wider European region is seeing increased tourist spending, which is the shift Burberry wanted to see - American and Asian tourists splashing the cash while taking in Europe's sights - a cornerstone of the business model. New products and ranges have been well received, with the important Leather Goods and Outerwear categories doing well.

We still think Burberry's doing a lot of the right things behind the scenes. It's worked to elevate the brand, investing in products and improving distribution. There's a new CEO, CFO and creative leadership leading the charge.

Elevating the brand will pay dividends in the form of higher prices and stickier customers. The further up the luxury ladder you go, the fewer customers tend to be swayed by economic ups and downs, including when money in the bank is losing its value faster than normal. So, while there is weakness coming through, luxury players are still in a better position than traditional retailers, especially where demand from ultra-high net worth customers is concerned.

The group's balance sheet is in reasonable health, with net debt not overly worrying as a proportion of cash profits (EBITDA). That provides the fuel for store and product investment and means the group is comfortable enough to increase shareholder returns. Dividends are back, and currently at a higher level than pre-pandemic. No shareholder returns are ever guaranteed.

Overall, the underlying reaction to new ranges and the uptick in sales means we think Burberry's in a good position to boost revenue, margins and, ultimately, profits in the longer term. That said, the short-term remains fraught with some real challenges, particularly in the confirmed guidance downgrades for the full year. Burberry continues to do what it can in tough circumstances, but there could be further bumps to come.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 12th January 2024