Why Burberry Can’t Cut Its Way Back Into Fashion
By STEPHEN WILMOT
April 14, 2016 11:55 a.m. ET
0 COMMENTS
Warn on profits, then cut costs: it is a pattern as well established as Burberry’s trademark tartan.
But it may not pay to pin high hopes on a big restructuring effort at the British luxury group, which has been hit by the tense security situation in Europe as well as the Chinese slowdown. Having already introduced a hiring freeze, ditched staff bonuses and slashed travel expenses, Burberry has limited room for operational maneuver.
The shares plunged Thursday in response to a downbeat trading statement. One key problem was the weakness of sales in the final quarter through March. Like-for-like retail sales fell 5% year-over-year as Chinese shoppers avoided Europe.
Securities worries on the continent following the Paris and Brussels attacks haven't helped Burberry. But growth in Chinese spending, which accounts for some 40% of Burberry’s sales, is slowing in any case. One bright spot is Japan, which has lately become a destination of choice among Chinese tourists. But Burberry is underrepresented in the country as it reverses a historic strategy of licensing out its brand.
The second black mark was a profits warning. Management currently expects pretax profits for the current year ending March 2017 around the bottom of the range of analyst forecasts. This equates to about ￡380 million ($541 million), according to FactSet, compared with ￡420 million expected for the year just passed. That is despite a ￡60 million boost from favorable exchange rates.
The U.S. wholesale business is partly to blame. Faced with slowing sales and ballooning inventory, department stores such as Bloomingdale’s and Nordstrom are clamping down on their orders of Burberry scarves and trench coats.
Importantly, the company’s bearish guidance excludes the impact of a “productivity and efficiency” plan due to be announced alongside annual results in May.
But it won’t be easy to cut costs. Burberry started clamping down on discretionary spending when the market deteriorated last summer, and saved ￡25 million against plan all-told. Rent increases are fixed, and some wage inflation is unavoidable. Chief Designer and Executive Chris Bailey ringfenced marketing last year, and seems unlikely to risk any damage to the Burberry brand he has so successfully nurtured.
Nor should investors expect a cash bonanza. As Burberry has built up its retail store estate in recent years, it has accumulated nearly ￡1 billion in lease liabilities. The ￡459 million of net cash on its balance sheet looks good but doesn’t tell the whole story.
Burberry’s valuation has suffered in recent years and the company now trades on 18 times earnings—in line with the embattled luxury sector. But May’s efficiency plan may underwhelm, and luxury spending shows little sign of rebounding. It is no time to bet big on Burberry.
Write to Stephen Wilmot at [email protected]
Retailer Ex Harrods, Giorgio Armani, Burberry, French Connection, Fila….
8 年They thought they could do it all themselves but sometimes you cannot!
Senior Retail/Wholesale Executive
8 年Quite a good article.However there is plenty of scope for them to cut costs without damaging the brand.Over the last few years you can plainly see that they have added too much to their cost base,which should be quite easy to reverse.One only has to see the number of new roles created to see that.The transition from Licensing to both retail and wholesale over the last few years has been very badly handled.For example they used to get some ￡28 million nearly all profit from Perfume and then bought out the last five years,wrote half the cost off in one year and apportioned the other half over five years .I am sure they are still a long way from breaking even on the deal.
Retired
8 年Some good points. The increasing focus on retail only business is a major factor in creating a more fragile model. The transition from licensing to retail in Japan comes at a critical time when income from other sources is also reducing. It is difficult to see how this income will be replaced in the short term.