Burberry shares punished for grim first quarter

The massive impact of coronavirus on luxury goods sales is all too clear in these results.

Burberry (LSE:BRBY) is running hard to stand still at the moment, although there are some grounds for optimism.

The fact that the pandemic emanated from Asia has resulted in the region being among the first to undergo something of a return to economic normality. This has been a double-edged sword for Burberry, whose reliance on the Asian consumer to the extent of 40% of sales, resulted in an early hit to sales but, equally, is now seeing some benefit from a gradually improving backdrop. 

While overall sales were down 45% in the 13 weeks ended 27 June, a severe impact which the company had anticipated, sales for June alone were down by 20%, which of course remains painful but rather more manageable.

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Indeed, the fate of the Asian consumer is having differing effects on Burberry’s prospects. In recent years, the company had benefited not only from sales in mainland China, for example, but also from the large and free-spending Asian tourist in Europe in particular. 

With regular overseas travel still some way off, some of these sales have been repatriated, and sales in China and Korea have returned to pre-pandemic levels in June. Burberry has more recently regarded accessories and leather goods as being key growth areas, and this appears to be showing some signs of success as those economies begin to recover.

New product launches have also bolstered the company’s offering, while a selection of pop-up stores has allowed a focus on consumers in a very localised manner to run alongside the digital presence which the company is continuing to grow.

Indeed, Burberry has upped its innovative game, with a particular focus on maintaining ‘brand heat’. It has been active on social media with the launch of new products underpinned by videos which have been well-received by its growing number of new, younger consumers on the likes of Instagram. 

The brand relevance to a new generation is especially timely given the economic backdrop, while also positioning Burberry as a fashion destination after the dust has settled. As such, online full-price sales increased by double digits in the first quarter which, alongside some return to form in Asia, has resulted in a rare piece of good news for the share price, which has risen by 43% since its March lows.

Burberry’s recovery is, however, a marathon and not a sprint. In terms of outlook, such as it is, the company expects June’s improving sales trend to continue, but this will still likely result in another 20% fall in the second quarter, pinning the decline down to between 40% and 50% for the first half. Gross margin will also be negatively impacted by between 2% to 3%, although this is in the context of higher margins given the profile of its average consumer and the higher-end products it provides. 

In the meantime, some stores will remain closed depending on local easing restrictions and of those that are operational, reduced opening hours are likely to persist for the time being.

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The duration of a return to normality remains largely unknown and ongoing political tensions in the Asia region are still a concern. Despite the recovery of the shares since the March nadir, the performance over the last year reflects these concerns, with the shares having dropped 22% in that period, as compared to a decline of 18% for the wider FTSE 100 index. 

The market consensus of the shares has recently deteriorated slightly to come in at a ‘weak hold’ and, even though Burberry is playing to its strengths as far as possible, the environment remains gruelling.