Burberry, the renowned British fashion house, has recently issued its second profit warning in a span of three months. The company attributes this downturn to disappointing sales figures experienced over the Christmas holiday period. As a result, Burberry’s shares have also incurred significant losses, marking a challenging time for the brand.
The luxury goods market worldwide has witnessed a slowdown, impacting Burberry’s sales during its crucial December trading period. Consequently, the company has revised its profit forecast for the full-year ending in March 2024. Burberry now anticipates adjusted profits ranging from £410-£460 million ($523-$587 million) – a decrease from the November forecast, which suggested profits would be situated towards the lower end of analysts’ projected range of £552-£668 million.
Following this announcement, Burberry’s shares experienced a decrease of 7% on Friday, potentially representing the steepest one-day decline since November 2023, as indicated by FactSet Research. Known for its signature trench coats and tan-colored scarves, Burberry has endured weaker sales across Europe, the Middle East, India, and Africa (EMEIA) as well as the Americas. In the 13 weeks ending December 30, the company recorded revenues worth £706 million – a 7% decline compared to the same period in 2022.
During the Christmas season, Burberry observed a 5% drop in sales within the EMEIA region and a 15% decrease in the Americas. A global decline in demand for luxury goods following the conclusion of the post-pandemic surge was deemed responsible for these poor performances. Fortunately, these setbacks were somewhat offset by a 3% rise in sales within the Asia Pacific region. This growth was primarily driven by an 8% increase in sales in China and a notable 9% boost in Japan.
Over the past year, the luxury goods market has faced numerous challenges as consumers exercise caution due to soaring inflation and macroeconomic uncertainties. Consequently, Burberry’s current situation necessitates prudence and a preference for established names in the market, according to Equita analysts led by Aleksandra Arsova. As Burberry undergoes a transition phase, it becomes imperative to approach relaunch stories with care within the current market environment.
Self-help in the fashion industry can be a formidable task, especially during challenging market conditions. Burberry, a renowned luxury brand, faced disappointment during the crucial fourth quarter of 2023, highlighting the immense difficulties involved. Analysts from AB Bernstein, led by Luca Solca, emphasize the recurring nature of this challenge.
Commitment to Revenue Targets
Despite past setbacks, Burberry remains steadfast in its commitment to achieve a revenue target of £4 billion by 2024. Furthermore, the company has ambitious plans to increase its annual revenues to £5 billion. To accomplish these goals, Burberry is undertaking a business transformation under the leadership of Daniel Lee, who assumed the role of creative director in September 2022.
Offloading Unsold Inventory
Leading luxury brands often bolster their revenues by selling unsold inventory at discounted prices through outlet stores. This strategy serves as a means to manage excess stock effectively.
Analyst Perspectives and Forecasts
RBC analysts, helmed by Piral Dadhania, express reservations about Burberry’s ability to deliver consistent earnings growth. The company’s historical reliance on various strategy and brand resets has yielded inconsistent results. Consequently, RBC analysts find Burberry’s mid-term revenue (£4 billion) and margin (20%) targets overly optimistic, projecting lower estimates for FY28E.
Reshaping with Daniel Lee
Daniel Lee’s inaugural collection for Burberry hit stores in September 2023. Stemming from his previous role as creative director at Bottega Veneta (owned by Kering), Lee brings invaluable experience that drove a substantial increase in sales for the Italian fashion brand.
Growth Strategies and British Identity
Burberry, with a rich heritage spanning 168 years, aims to cultivate its unique British identity as part of its growth plans. This strategic focus entails an emphasis on high-margin handbags and accessories, capitalizing on Lee’s expertise in leather goods.
Jonathan Akeroyd, CEO of Burberry, acknowledges the ongoing challenges faced by the brand. While progress has been made in transitioning to Burberry’s modern British luxury expression, the current slowdown in luxury demand presents additional hurdles.