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Can Burberry escape a chequered past for a life of luxe?

Can Burberry escape a chequered past for a life of luxe?

Burberry is well on its way to reinventing itself, with an ambitious strategy to put it on par with upper-end rivals such as Gucci and Dior.

But are the changes enough to ensure triple quilted, hand-stitched returns or is the company's proposition increasingly threadbare?

In the first quarter, the company reported weaker-than-expected numbers, with total sales up just 3% year-on-year, with declines in Europe, the Middle East, India and Africa.

Chief executive Marco Gobbetti said he is confident in the future of the business. He admitted however that ‘it will take time to achieve our ambitions’ such as hoped for cost savings of £100 million.

Sales were impacted by a fall in tourist demand and macroeconomic conditions. Investors took fright at the update, with an immediate sell-off sending shares 5% lower, although they have since recovered to trade just beneath June's record highs.

Both consumers and investors are holding their breath for star designer Riccardo Tisci’s debut collection in September, to assess whether Burberry can really achieve the turnaround it has been talking about.

In addition to external pressures, the reorganisation of the business is creating difficulties for the company in the short term, according to Richard Buxton, manager of the Old Mutual UK Alpha fund.

‘Burberry has seen a huge amount of change recently, with a new management team installed to take the business, and the brand, to the next level,’ he says.

Buxton argues that this will mean profits are unlikely to grow meaningfully as the company cuts some of the ‘least luxury’ parts of its range.

‘However, this will allow Riccardo Tisci, the new “star” chief creative officer, and his team to set about transforming the brand into the realms of exclusively high-end luxury,’ he says.

In fact, over the last year, Burberry has burnt £28 million of unsold stock to protect its luxury brand status. 

Helal Miah, investment research analyst at The Share Centre, is more sceptical. ‘Strategies, such as taking the brand even more upmarket, have the potential to backfire and alienate traditional customers as we have seen with other brands in the industry.’

Steve Clayton, head of equity funds at Hargreaves Lansdown, shares this concern, despite holding Burberry. 

‘It is not a risk-free process, there is always a danger of alienating the existing customers whilst failing to win new ones.’

But if the company gets it right, Buxton says there will be more collaborations like the one recently announced with iconic designer Vivienne Westwood, as well as more frequent product releases, which should improve the brand.

Online presence

Despite the mixed update, Burberry’s online platform continues to be strong, with mobile sales now the largest platform of digital sales.

Its range of newly launched handbags have also performed well, which the company said is ‘a positive early sign for the transformation of’ its leather offering.

Miah says that this bodes well for the recent acquisition of Italian leather goods supplier CF&P, which Burberry made to boost its handbag business.

‘If executed successfully, in our view, this will mean substantially higher profits in the medium and long term as we have seen from other luxury turnarounds, the most recent of which being the phenomenal success of Gucci,’ says Buxton.

However, at the moment, all of this is ‘an intention rather than reality’, according to Clayton.

‘The chief executive has relatively recently arrived and his creative director is yet to produce any product that has been put in front of paying customers.’

Careful execution

While he supports the management’s vision, Clayton views it as a long-term story that needs to be carefully executed.

‘They have a designer that has come in from a high-end brand, the chief executive has exposure working in the top end. Frankly, if the world is looking for luxury with a British slant to it, there is not really a better brand out there.’

Miah adds that even with the cost of repositioning the brand, Burberry has still managed to stage a good recovery over the last two years.

‘Burberry was helped by cost cuts and restructuring in its key Asian markets. Cost cuts and other strategic initiatives are still ongoing and should be welcomed by investors along with a £150 million share buyback scheme.’

He adds that Asia remains a key market for Burberry, and growth in sales in Asia Pacific is encouraging.

‘Its key market of Asian consumers have been returning and spending, and more of them have been spending in their home locations in Hong Kong, China and Japan rather than travelling abroad,’ says Miah.

Clayton adds: ‘In the short term, I do not really think the quarterly sales trend matters that much because we are looking at the performance of the final ranges of the previous design team.

‘But the value in Burberry is going to come out of the longer term success of Riccardo Tisci’s new ranges and whether they can get the attention of the very top end customers.’

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Steve Clayton
Steve Clayton
6/206 in Equity - UK (All Companies) (Performance over 1 year) Average Total Return: 9.25%
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