Asia bites Burberry profit

Hong Kong has been blamed for a further decline in Burberry profit and a consequential cutback of staff and products.

The British luxury goods brand has reported an 8 per cent fall in adjusted pre-tax profit to £421 million in the year to March 31 on flat revenue of £2.5 billion.

In an earnings call, CFO Carol Drinkwater said trading in Hong Kong and Macau, which account for about 8 per cent of sales, remained tough, but the group’s stores there are still profitable, and all luxury brands were affected.

“Conditions remain extremely challenging,” she said.

As Andy Hall, analyst at Verdict Retail, explains, retail like-for-like sales were down by 1 per cent globally.

But that was entirely due to falling demand in Hong Kong and Macau, where Burberry and its peers have had to contend with a collapse in demand for luxury goods. Excluding the two territories’ figures, same store sales rose a more respectable 3 per cent.

“While the Burberry brand retains appeal globally, wider economic conditions and trading in traditionally lucrative Asian markets has dampened footfall, and hurt luxury players like Burberry the most,” said Hall.

CEO Christopher Bailey is now looking to create a more efficient retail operation – with a £100 million cost reduction plan to be implemented over the next two years to restore profit growth and appease increasingly nervous shareholders while it weathers the Hong Kong storm.

The company plans to cut between 15 and 20 per cent of its products across all its range, focus more on handbags and eliminate about 100 jobs.

“I am mindful we are embarking on this plan at a time when our industry is facing significant challenges,” said Bailey, who has seen the company’s market value fall by about 37 per cent over the last 12 months.

Handbags have higher margins and the company is not selling as well as rivals Louis Vuitton and Prada in that category.

Furthermore, Burberry is aware it needs to increase its sales per square foot, currently estimated at around 1600 euros a year, a third that of Louis Vuitton and also well behind Moncler and Prada.

Bailey has conceded Burberry is not as good as its rivals in “retailing basics”. It now plans to make its stores more productive by further tailoring ranges for local customers, improving customer service, increasing staff training and reviewing merchandise to highlight a reduced, simpler range of product.

Hall says a renewed focus on in-store service and productivity would bring Burberry in line with the focus of luxury peers and would create a leaner, fitter operation with which to take the blows being dealt by a declining global demand.

“Burberry’s decision to streamline its product ranges, at the same time as introducing some new products such as its Scarf Bar and new male fragrances, demonstrates its commitment to innovation, and attempts not to be left behind by other luxury fashion players.”

Hall says Burberry has a lot of attributes in its favour and the collapse in demand in Hong Kong is unlikely to be its undoing.

“However, with the retailer now re-focusing its efforts on retail (which accounts for 73 per cent of group revenue), it is crucial it continues to make pro-active improvements to the business. Examples of this – such as its reshaping of the fashion-show calendar, and imminent relaunch of website, will help the brand to retain strong recognition, and ensure it holds its appeal even as the wider trading backdrop remains challenging,” said Hall.


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