- Better-than-feared second quarter
- New recovery strategy unveiled
- £40 million-cost saving initiative
Quintessentially British luxury brand Burberry (BRBY) topped the FTSE 250 leader board on 14 November, the out-of-fashion firm's shares rallying 14% to 835p as its second-quarter results beat gloomy expectations and new boss Joshua Schulman unveiled a turnaround strategy.
A rumoured bid target for Italian outerwear rival Moncler (MONC:BIT), the struggling trench coats-to-cashmere scarves seller swung into the red on a plunge in first-half revenue, yet ambitious new broom Schulman believes Burberry can get back to generating £3 billion in annual revenue.
IN NEED OF A MAKEOVER
Results for the half ended 28 September showed a 22% plunge in revenue to £1.09 billion and retail comparable-store sales down 20%, resulting in a lurch from adjusted operating profit of £223 million to a £41 million loss.
While second-quarter sales remained subdued, the 20% drop in like-for-likes was a smidge better than the 21% decline expected by analysts.
Operating margins were a touch ahead of estimates, and Burberry also flagged second-quarter improvements in the EMEIA and Americas regions.
The real excitement centred around Schulman’s turnaround plan, ‘Burberry Forward’, however, which will see the fashion house focus on core strengths, including its category authority in outerwear and scarves, and re-align its pricing, particularly in leather goods.
Schulman is also pulling the cost-cutting lever, with a £40 million savings drive underway, but he has also made new hires in marketing and merchandising.
The one thing out of his control is Chinese consumer sentiment, with the weak backdrop in mainland China extremely unhelpful to Burberry given its reliance on this market in recent years.
The new chief executive recognises there is ‘much to be done in the short term’ and is ‘acting with urgency’, expressing confidence the company can get back to generating £3 billion in annual revenue over time while rebuilding margins and driving strong cash generation.
WHAT DID SCHULMAN SAY?
‘Today, we are acting with urgency to course correct, stabilise the business and position Burberry for a return to sustainable, profitable growth,’ said the CEO.
‘We have a powerful brand with broad appeal among luxury customers, authority in the outerwear and scarf categories which have remained resilient through this period, and a strong presence in all key luxury markets. Now, we have a clear framework to reignite brand desire, improve our performance and drive long-term value creation. Building on our strong foundations, I am confident that Burberry’s best days are ahead.’
EXPERT VIEWS
Mamta Valechha, consumer discretionary analyst at Quilter Cheviot, said the mixed bag of results reflected what is still a very tough backdrop.
‘Burberry’s tilt towards aspirational consumers is being increasingly challenged as their wallets are being stretched, and the group’s unsuccessful attempt to “premiumise” the brand has done little to help either.
‘As is the case with many other luxury players, Asia remains a particular weak spot for Burberry, while Europe and the US are gradually showing signs of improvement, albeit from a low base.’
Valechha added that Schulman’s strategy geared towards making the brand desirable ‘will be under close scrutiny, but with hope it could present a turning point in what has been a very difficult period.’
Jefferies said Schulman ‘looks focused on reigning back in the design ambitions of previous collections, with a refocusing on the outerwear heritage of the brand. This is how revenues will rebuild to £3 billion’, although the broker believes ‘the task of rebuilding sales densities, and by extension margins back to double digit levels, remains an arduous one.’
