Burberry Group plc (BRBY) Ordinary Shs 0.05
HL comment (15 July 2020)
First quarter retail revenue of £257m fell 49% at constant exchange rates, or 45% on an underlying basis. The group saw a progressive improvement over the quarter so that revenues were down only 20% in June.
Burberry expect a decline of 15-20% in second quarter retail revenues, with wholesale revenues down 40-50%. Based on these assumptions Burberry expects gross margins to fall 2-3 percentage points in the first half while operating costs fall by a mid-teens percentage compared to last year.
The shares fell 5.2% in early trading.
With shops shut and international travel at a standstill Burberry was always going to struggle in this pandemic. First quarter sales are correspondingly ugly.
Luxury fashion is heavily reliant on international travellers, and the lack of Asian tourists in particular has hit revenues hard. Although global sales have recovered a bit, thanks in part to a corresponding increase in domestic Asian Pacific sales, travel restrictions mean the immediate future continues to look gloomy.
Fortunately the group's balance sheet is formidable, with nearly £890m of net cash at the start of the year. That didn't stop it cutting the dividend, but it does mean management have the firepower to weather a crisis while still investing in a turnaround plan showing early signs of progress.
Marco Gobbetti has focused on consolidating Burberry's position at the very top of the value chain. The plan calls for a review of how products are sold, including cutting ties with non-luxury partners. The obligatory restructuring (with accompanying cost savings) makes an appearance too, while digital channels and stores themselves are also getting some serious TLC.
85% of all mainline store products are now from the revamped range. This pivot to the top end of the value chain will be a boost to margins in the long-run, and it's a strategy we admire.
Crucially, Burberry's customers seem to agree. Trading was actually ahead of expectations before coronavirus hit. Investment in online marketing and sales initiatives are also paying dividends - with good online growth in the first quarter offsetting some of its lost retail sales.
We should note global recessions are less of a problem for luxury retailers - spending by wealthy customers has tended to hold up better than the average consumer. However, the real worry is that 'second waves' of the virus cause a return to the lockdowns that saw sales evaporate. If those were to continue for any length of time the need to conserve cash could endanger the turnaround plan.
Overall we think Burberry is well placed - a strong brand and mountain of cash is a powerful combination. However, a lot still rests on the turnaround plan if the group is to boost sales, margins and ultimately profits in the longer term. The current disruption means it's difficult to assess exactly how that process is going
Burberry key facts
- Forward Price/Earnings ratio: 25.4
- 10 year average Forward Price/Earnings ratio: 20.0
- Prospective yield: 1.8%
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First Quarter Trading Update
Sales in the Asia-Pacific region fell 10% in the quarter, but returned to growth in June. Mainland China actually saw sales rise by a mid-teens percentage in the quarter and 30% in June, as the region benefitted from the repatriation of sales due to ongoing travel restrictions.
EMEIA (Europe, Middle East, India and Africa) saw sales fall 75% in Q1. While sales improved in June, travel restrictions remain a headwind. Burberry saw a similar trend in the Americas, where sales fell 70% for the quarter as a whole.
Online sales grew double digits in the quarter, with efforts to develop online marketing including region specific campaigns. Recent product launches have been well received, with a particularly strong result for Leather goods in Mainland China and Korea.
Planned restructuring is expected to save the group £35m in 2021 and annualised savings of £55m at a total cost of £45m. This is additional to the £140m of cost savings already announced.
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