Burberry’s third quarter like-for-like (LFL) retail revenue fell 4% to £659mn, ignoring the impact of exchange rates, which was much better than market expectations of a 12% decline.
The Americas saw like for like revenue rise 4%, with strong marketing efforts helping to drive local sales. Asia Pacific revenue fell 9% (-19% expected), including a 7% decline in Mainland China and a 4% improvement in Japan.
Burberry now expects second-half results to “broadly offset” the £41mn of underlying operating losses suffered in the first half.
The shares rose 14.3% in early trading.
Our view
Burberry was holding out for a Christmas miracle, and while total third-quarter revenue was still moving in the wrong direction, the low single-digit declines of recent months are a sharp improvement from the 20% slump seen in the first half.
This recovery comes from Burberry’s refreshed strategy, aimed at reigniting demand for the British brand. CEO Joshua Shulman is aiming to return Burberry to its origin, focussing on outerwear first, and customers have responded positively to new marketing campaigns.
We welcome the change of tack, rather than the headstrong focus of the past, which centred on high-end price points and leather goods. The improved revenue trajectory, alongside £25mn of expected cost savings, means Burberry is now hopeful that its second-half performance will largely cancel out the £41mn operating loss suffered in the first half.
We don’t expect this to cause a swift turnaround in fortunes though. Building brand desirability requires a lot of investment and even more patience, so it could be some time before profitability really ramps up again, if at all.
In the near term, there’s also plenty of demand uncertainty in the luxury sector. Cost savings will continue to be key to softening the impact on the bottom line, but they’re more of a plaster than a long-term solution.
The ratio of net debt to cash profit has risen quickly over the last year. Dividend payments have been paused in a bid to try and shore up the balance sheet. We can’t see these payments resuming anytime in the near future.
We think stopping dividends was the right move and should help to keep some kind of cash cushion while Burberry invests for the future and finds its feet again. The group still has access to plenty of cash, so liquidity isn’t a concern for now.
The short term remains fraught with some real challenges. Given the uncertainty around whether the group will make any profit this year, we’ve moved to valuing Burberry on a price-to-sales basis in the figures below, which now provides a fairer historical comparison.
Burberry’s valuation is some way below its long-run average. While this may look like a potentially attractive entry point on first glance, it also reflects the near-term risks and weak consumer demand. A turnaround will require a lot of patience and work to fully leverage the group’s history and brand. Investors should be focussed on the long term and can likely expect some ups and downs along the way.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Burberry’s management of ESG risk is strong.
The group has a very strong environmental policy and executive compensation is explicitly tied to ESG performance targets. However, overall ESG reporting falls short of best practice.
Burberry key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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