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Burberry - sales rise on China rebound

Burberry's first quarter retail revenue rose 19%, ignoring the effect of exchange rates, to £589m.

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Burberry's first quarter retail revenue rose 19%, ignoring the effect of exchange rates, to £589m. The uplift was driven by a rebound in Mainland China, following the easing of restrictions and a strong performance from European tourists.

This helped offset an 8% decline in the Americas, where a dip in domestic spending was only partially offset by spending by outbound tourists.

The group reiterated guidance, and remains on track to deliver low double-digit revenue growth in 2024 and around 20% underlying operating margin.

The shares were broadly flat in early trading.

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Our view

The market had a muted response to Burberry's first-quarter figures. Ultimately, the group's performance has been fairly underwhelming for a little while, which has seen the valuation come under some pressure.

But let's start with the good news.

China is responsible for a big chunk of revenue, both within its borders, but also from Chinese tourist spending abroad. To that end, it's been a welcome relief to see demand rebound now restrictions have eased.

Away from China, Europe is doing very well. Demand for accessories and leather goods is positive. That suggests Burberry's doing everything right behind the scenes, and the creative success should result in a boost to the Asia Pacific region when trading gets back to normal.

Ultimately, Burberry's efforts to be seen at the top end of luxury fashion have 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 market will be watching operating margins like a hawk - the group's plans are admirable here, but executing a reduction on per-unit-costs to this degree is a very tall order.

We're also mindful that revenue in the Americas is lacklustre, with sales dipping 8% in the first quarter as domestic shoppers pulled back on spending. This is likely a reflection of the difficult economic conditions in the region, including the fact US consumers are running down their savings at quite a fast rate. We're not overly concerned at this point, but we'd like to see some more detailed guidance for this region at the half year mark.

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

Overall, 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 remains fraught with some real challenges, and we'd like some proof of sustained delivery on sales expansion before popping any champagne. That uncertainty isn't necessarily reflected in the current valuation.

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: 14th July 2023