Burberry a fashion victim as profits hit by luxury slump

Full year profits from Burberry fell 10%, at the bottom of analysts' range of estimates, and the fashion retailer warned that it expects 2017 full year adjusted profit before tax "to be towards the bottom of the range of analysts' expectations".

To try and sweeten the pill, Burberry said it would make £100m of cost savings and launch a £150m share buyback to help the business and investors cope with conditions that have remained challenging, with cost inflation pressures persisting despite the cost-cutting push.

"While we expect the challenging environment for the luxury sector to continue in the near term, we are firmly committed to making the changes needed to drive Burberry's future outperformance, underpinned by strong brand and business fundamentals," said Christopher Bailey, chief creative and chief executive officer.

For the year to 31 March 2016, Burberry generated underlying revenue of £2.5bn, which was down 1% on the previous year, while like-for-like (LFL) sales were also 1% lower, dragged down by Hong Kong and Macau.

Adjusted profit before tax fell 10% at constant currencies to £421m, but was helped by currencies at the reported level.

Adjusted earnings per share shrank 9% to 69.9p but to ease investor's pain, the full year dividend was lifted 5% to 37p.

As well as the share buyuback that starts in the new financial year, directors said that after reaching the dividend payout target, it had been decided to move to a progressive dividend policy so that the dividend per share in the current year would be "at least in line" with last year's. Analysts said this implied earnings will fall again.

Luxury lagging

The retailer's financial performance reflected a difficult period for the luxury sector as a whole as demand slowed in many markets, with Asia Pacific enduring a mid single-digit percentage decline in LFL sales during the year.

Hong Kong, 9% of group retail/wholesale revenue, was affected by significantly lower footfall, although cost-cutting ensured all stores remained profitable. Excluding Hong Kong and Macau, Asia Pacific delivered a low to mid single-digit percentage increase in LFL sales as mainland China and Korea both showed positive comparable growth during the year, improving in the second half.

Despite areas of weakness, Burberry said its "brand momentum" remained strong as the company continued to focus on innovation around product, digital and marketing, while keep discretionary costs tightly controlled.

Bailey said he continued to see "significant opportunities ahead of us and have put ambitious plans in place to increase future revenue, enhance productivity and create a more efficient organisation".

This year roughly £10m will be invested and then about £20-25m per annum for the next two years through in retail, digital and enhancing critical capabilities

Improvements in retail productivity are expected to drive about half the revenue growth over the three year period, with e-commerce initiatives accounting for about another third.

Analyst opinion

Independent retail analyst Nick Bubb said he felt the most interesting comments were about product, with Burberry flagging that “our assortment is generally wider than our peers and we have an opportunity to simplify this to give greater visibility to fashion and newness” and that it is to rebalance marketing from brand towards key product.

RBC Capital maintained there were "no surprises" and that profits were in line with consensus forecasts of £420m, though 2017 guidance of around £375m is well short of current median consensus of £416m.

"The bull will focus on the announced multi-year cost savings war-chest and support from buybacks. But the fact is that FY2017 PBT consensus should come down materially again - by ~9% - and the buyback should not be enough to offset another round of consensus EPS downgrades against an external environment that should remain difficult in FY17."

Steve Clayton at Hargreaves Lansdown said the 2017 guidance "offers little near-term comfort and the cost savings and buy-backs will do little to move the dial" given the company's run of downgrades.

But feeling there remains a "great brand at the heart of Burberry" that needs stronger Chinese demand to shine, he said he still likes the stock on a longer term view: "it has a robust balance sheet and offers an attractive yield for a company with its growth potential - if and when the Chinese consumer comes out to shop again, things should start looking up for the retailer."

Shares in Burberry initially fell below 1,100p, still above January's three-year lows, but by 0930 BST on Wednesday were at 1,118p, for a 2.2% fall on the day.