ii view: Burberry goes back to basics

First-half results to 28 September

• Revenue down 22% to £1.09 billion
• Adjusted operating loss of £41 million, down from a profit of £223 million
• No dividend payment
• Net debt before lease liabilities of £278 million, down from net cash of £63 million

Chief executive Joshua Schulman said:

"My first few months have reaffirmed my belief that Burberry is an extraordinary luxury brand, quintessentially British, equal parts heritage and innovation. Burberry's original purpose to design clothing that protects people from the weather is more relevant than ever. 

“We have a powerful brand with broad appeal among luxury customers, authority in the outerwear and scarf categories which have remained resilient through this period, and a strong presence in all key luxury markets. Now, we have a clear framework to reignite brand desire, improve our performance and drive long-term value creation. Building on our strong foundations, I am confident that Burberry's best days are ahead."

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ii round-up:

Started back in 1856, Burberry Group (LSE:BRBY) is today a British luxury brand whose shares are a constituent of the FTSE 250 index. 

Competing against rivals such as Ralph Lauren Corp Class A (NYSE:RL) and Hugo Boss AG (XETRA:BOSS), Burberry largely sells clothing products including outwear and leather goods. 

Its products are sold on both a retail and wholesale basis, with retail generating just over four-fifths of revenues and wholesale providing most of the balance.

Retail outlets as of late March numbered 231 stores, 143 concessions, 55 outlets and 33 franchised stores.

For a round-up of these latest results announced on 14 November, please click here.

ii view:

Continued challenges resulted in new chief executive Joshua Schulman being appointed in July. His previous experience includes time at Michael Kors, Coach, Jimmy Choo and Gucci. A back-to-basics strategy is now being pursued including a re-emphasis on outerwear, heritage and re-introducing lower product pricing points.  

Geographically, Asia remains dominant generating around 42% of sales over its last financial year, split relatively evenly between China and the rest of Asia Pacific. Europe, the Middle East, India and Africa comes in next at 24%, followed by the USA at 18%, the UK at 10% and Latin America most of the balance. 

For investors, a previous loss of focus and elevated product pricing against a backdrop of pressured consumer spending now leaves Burberry reporting a first half loss, with a possible full year loss now in the offering. Sales for its core Asia region deteriorated to a fall of 28% in Q2 from a fall of 23% in Q1, likely hindered by property woes and economic challenges in China. Costs generally for businesses remain heightened, the dividend has been suspended, while group net debt now sits in contrast to previous net cash held.    

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More favourably, the relatively new chief executive is looking to pursue a strategy taking Burberry back to basics. Overall groups sales fell 20% in Q2 compared to a fall of 21% in Q1, suggesting some possible stabilisation. A halting of the dividend offers increased spending flexibility, while previous rumours of takeover interest from Moncler SpA (MTA:MONC) likely point to an ongoing viewing of Burberry’s situation by industry rivals.   

In all, a recovery in Burberry’s performance is far from assured with headwinds likely to persist. That said, the new group head looks to have made an encouraging start with existing shareholders now likely to stay cautiously patient.   

Positives: 

• New CEO
• Product and geographical diversity

Negatives:

• Difficult relations between the West and China
• Currency movements can provide headwinds

The average rating of stock market analysts:

Hold