Burberry benefits from double pound boost, wholesale guidance cut

Burberry's like-for-like sales improved in the second quarter thanks to a spike in fashion-conscious tourists to the UK, but while it confirmed a larger potential profits boost from currency fluctuations, wholesale revenues cast a stain on the results.

For the six months to 30 September, total revenue of £1.16bn was up 5% at reported level but down 4% underlying and moderately short of Bloomberg consensus of £1.17b, with 11% growth in retail or 2% underlying at constant currencies.

In the second quarter, like-for-like sales bounced back 2% after the 3% decline in the first with Asia positive outside of Hong Kong, Americas down and Europe, Middle East, India and Africa (EMEIA) delivering low growth.

Europe's improved performance was mainly down to a 30% surge in comparable sales in the UK from travelling luxury customers lured by the slide in sterling.

However, Hong Kong and Macau continue to hold back growth in Asia Pacific, with underlying sales down 1% as mainland China improved but Hong Kong continued to experience negative footfall.

Domestic demand in the Americas remained "uneven", with spending from travelling luxury customers remaining down by a double-digit percentage and overall underlying revenues down 12%.

Moreover, while wholesale revenue was down 14% underlying, broadly in line with guidance, for the full year wholesale revenues are now expected to decline in the mid-teens, down from the 'over 10%' guidance given at the first quarter trading update in July.

Retail guidance was unchanged and management's plans to drive revenue growth and improve productivity were said to be "well underway", with the company on track to deliver planned cost savings of "around £20m" in the full year.

Moreover, Burberry said at 30 September exchange rates there would be a £105m benefit for full year profits from currency movements with a further rise to £125m if rates remained as they had in the weeks since, up from the £90m it had guided to in July.

RBC Capital Markets said the second-quarter retail LFL growth of 2% was in line with market expectations while wholesale performance and guidance was a bit softer than it had expected.

"We suspect that LVMH Q3 has probably raised the bar for all luxury names reporting this month and Burberry had a good run into this IMS," it added.

George Salmon, analyst at Hargreaves Lansdown, sais that while Burberry's UK stores were a beneficiary of the weak pound, the UK makes up a relatively small percentage of group revenues.

"So while the group has managed to deliver improving like-for-like growth in its stores this quarter, this was achieved against a pretty unchallenging comparative period. Conditions remain difficult,” he said.

Shares in Burberry fell close to 8% on Tuesday morning to as low as 1,370p before flattening off.