Burberry Group plc (BRBY) Ordinary Shs 0.05
HL comment (16 May 2019)
Ignoring the effect of exchange rates, Burberry's full year revenue was down 1% to £2.7bn. Underlying operating profit was flat at £438m, despite the delivery of better than expected cost savings.
The full year dividend rose 3% to 42.5p, with a further £150m share buyback announced.
The shares fell 2.5% following the announcement.
Marco Gobbetti is focused on consolidating Burberry's position at the very top of the value chain. That will take time, but if it can be done the rewards are considerable.
The transition involves reviewing where and how its products are sold. Digital will get more investment, while Burberry's physical stores are getting a refurb to maintain that premium image. Of most interest is the decision to cut ties with several non-luxury wholesale partners.
The withdrawal means sales and profits are being forfeited in the short term, so Burberry is taking a bit of a gamble. However, Gobbetti clearly thinks selling in sub-optimal conditions and potentially diluting the premium image, is the greater risk.
We empathise with his view. In fashion, appearances matter, and Burberry's 163 year old brand is its most valuable asset. In the UK the group is only just shaking the 'football hooligan' image it acquired in the early noughties.
The plan relies heavily on the creative prowess of Chief Creative Officer, Riccardo Tisci. He's not been at Burberry for long, although his initial collection looks promising. But it would be foolish to think all of Burberry's success is down to a revived creative team fussing over fabrics.
Far more important has been Burberry's success in marketing to the Chinese nouveau riche. Despite a crackdown on corruption denting demand for luxury goods in China, Asia still accounts for over a £1.1bn of sales and more recent trends have been positive.
Overall, we like Burberry. Management has shown a willingness to grasp the nettle and do the right thing for the long term. With luxury consumers prepared to pay handsomely for that special item, high margins and impressive cash generation are both possible.
Like many of its regular customers, Burberry has an impressive cash hoard. A hefty buyback programme is eating into it a bit, but there's still well over £800m sitting around waiting to be used. We'd rather the group found a productive way to deploy the cash but it does mean the dividend, which offers a prospective yield of 2.4% next year, should be able to grow - but as ever there are no guarantees.
Full year results (at constant currency unless otherwise stated)
Like-for-like sales rose 2% within Retail, with the majority of growth coming from the first half of the year. Mainland China delivered stronger growth in the second half, thanks to improving tourist trends. Elsewhere, sales growth in the UK and Europe offset declines in the Middle East.
Within the division, 18 stores were shut in the year, with openings in China and expansion to the flagship Dubai store.
Wholesale, excluding changes to the Beauty portfolio, saw revenues increase 7% to £488m. That was slightly better than expected, due to the favourable timing of shipments, and growth in Chinese travel spending.
Retail and Wholesale delivered a combined operating profit of £396m, down 4% compared to last year. The decline was due to the reduction in non-luxury partners in the US, and the transition of Beauty to a licensed partnership. As a result of that change, licensing profits improved 61% to £42m.
Ignoring the effect of lease obligations, net cash now stands at £837m.
Burberry expects broadly stable revenues and operating margins in 2020, and has increased cost saving guidance to £135m by 2022.
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