Burberry profits fall as it plans £100m cost savings, but analysts say it all depends on the Chinese consumer

18th May 2016

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High end fashion retailer Burberry has announced as three year turnaround plan after profits fell by 10%, with analysts rating the firm a hold.

Helal Miah, investment research analyst at The Share Centre says: “Burberry indicates that 2017 profits are likely to be at the bottom end of its range after announcing the second straight fall in annual earnings. Adjusted pre-tax profits fell 10%, which is only slightly higher than analysts’ expectations. Pressure remains on Burberry to turn things around after sales in Hong Kong have fallen 20% in three straight quarters and spending in Europe and the US remains soft.

“Investors will note that Burberry has announced an ambitious three year plan to deliver at least £100m a year in cost savings. However, the difficulties highlighted in today’s results are only likely to put more pressure on its CEO, with some analysts and investors starting to question his ability to lead the company. “The slowdown in China is still concerning and is the key reason we maintain our ‘hold’ recommendation on the stock,” says Miah.

Steve Clayton, Head of Equity Research, Hargreaves Lansdown says: “Trading conditions in Hong Kong have taken their toll on Burberry, and the company is responding to challenging conditions by cutting its cloth accordingly, aiming for £100 million of annual cost reductions by 2019.

“The travelling Chinese luxury consumer is clearly still reluctant to come out and spend money at the moment, and as long as that remains the case, things are likely to remain tough for Burberry.

“Guidance toward the bottom end of the range offers little near-term comfort and the cost savings and buy-backs will do little to move the dial, given the steady slew of downgrades that shows little sign of abating. There is a great brand at the heart of Burberry, but it needs stronger Chinese demand to shine. The reductions in longer term market growth expectations are disappointing, but reflect the new reality.

“Longer term we still like Burberry, it has a robust balance sheet and offers an attractive yield for a company with its growth potential. If and when the Chinese consumer comes out to shop again, things should start looking up for the retailer.”

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