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Burberry - slowdown in luxury demand pulls targets into question

Burberry's first half revenue rose 7% ignoring the effect of exchange rates, to £1.4bn.

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Burberry's first half revenue rose 7% ignoring the effect of exchange rates, to £1.4bn. Higher expenses contributed to underlying operating profits rising at a slower rate than revenue, up 1% to £223m.

All regional growth slowed in the second quarter, with the Americas the weakest performers. Outerwear and leather goods saw total first half comparable retail sales growth of 21% and 8%.

There was a free cash outflow of £15m, compared to an £88m inflow last year, partly driven by investment in product and distribution improvements. The timing of collections and increased inventory ahead of the festive trading season also had an effect.

Current trading is being affected by a slowdown in global luxury demand. Burberry warned that if weakness continues, it would be unable to meet its full year revenue targets, and operating profit would be at the lower end of guidance in that scenario.

An interim dividend of 18.3p was announced, up 11%.

The shares fell 9% following the announcement.

View the latest Burberry share price and how to deal

Our view

Burberry is feeling the effect of cooling demand for luxury goods. Consumers are tightening their belts and that's hurting even higher-end consumers. News that full year targets might not be reached has seen further pressure heaped on a valuation that's already had a difficult run.

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

The strength in demand in the first quarter is further proof 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. 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. 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 are concerned.

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 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 likely guidance miss for the full year. Burberry has done everything 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
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: 16th November 2023