Analysts welcome shake up at top of Burberry but worries persist about falling spend from Chinese tourists

13th July 2016


Like for like sales at Burberry fell 3% in the first quarter with concerns that Chinese tourists may not be spending as much as they used to.

The update came hot on the heels of the news that Chief Executive, Christopher Bailey is to step back into a primarily creative role, with a new CEO joining.

At its preliminary results, Burberry announced plans to drive longer term growth through focusing on product design, retail productivity and their e-commerce strategy, whilst changing the ways of working to drive costs down.

These plans are said to be progressing well, even if cost pressures remain. The group is confident of hitting the (modest) financial goals outlined in the prelims, which at the time implied a decline in profits in the coming year. The improved currencies position could lead to a reported outcome a little better than this, if maintained.

The new CEO is expected to join early in 2017 and in the meantime, Burberry is commencing a £150m share buy-back programme.

Steve Clayton, Head of Equity Research, Hargreaves Lansdown says: “Trading conditions are still tough, and Burberry seem to be really suffering from the wider reluctance of Chinese tourists to spend like they used to. The challenge posed by this is clearly worsening and whilst the group is promising cost cuts and a share buy-back, there is little to get excited about in the near term.

“Longer term we still like Burberry, the business has a robust balance sheet and throws off a lot of cash. Luxury goods have been a good sector to be exposed to, because clients are prepared to pay handsomely for that special item, leading to good margins most of the time.  Moreover, while luxury consumers are not risk-free clients, they do tend to be resilient, because wealth is typically more durable than income. Burberry still has plenty of potential, but it could take a while for the good news to outweigh the bad.”

Helal Miah, investment research analyst at The Share Centre said: “Burberry has revealed the scale of the challenge facing new Chief Executive Marco Gobbetti as it updated the market on its first quarter performance this morning.

“The luxury fashion retailer reported a 3% fall in like-for-like sales, while there was little change in retail revenues at £423m. However, investors should acknowledge that the drop in sales was less than expected, while revenue beat consensus estimates. Burberry says the trading environment remains challenging but is confident that changes to management roles at the top should be supportive of growth ahead, as it plans to cut costs, narrow ranges and focuses on online sales.

“The company announced this week that luxury goods veteran Mr Gobetti will replace Christopher Bailey as Chief Executive. Mr Bailey, who is widely considered as the face of the brand, will be demoted to President and Chief Creative Officer.”

“We have been vocal about the fact that the chief creative officer needs to be answerable to the CEO and that Christopher Bailey was not equipped to handle two roles at Burberry and so believe this news should be welcomed by the market. Christopher Bailey’s talent is on the creative side of the business, relieving him of the CEO duties should help him focus the group’s product portfolio. Bringing in a veteran of the industry should help the business manage through difficult market conditions.”

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