Burberry profits and cashflow outstrip forecasts

Burberry presented a smart first set of full year results under new chief executive Marco Gobbetti, pinning on a £150m buyback buttonhole as well as outstripping City forecasts despite a slight wrinkle in revenues.

The top line was down 1% to £2.7bn in the 12 months to 31 March, with like-for-like store sales up 3% after a slight slowdown to 2% in the second half. Adjusted operating profits of £467m were up 2% on the previous year, or 5% at constant exchange rates, and ahead of the £453m average analyst estimate thanks to cumulative annual cost savings rising to £64m from £20m a year before.

Following the November launch of his long-term plan to "re-energise" Burberry and take the brand further upmarket in search of stronger profit margins, Gobbetti said the FTSE 100 company was on track and "showing promising early signs".

As part of Gobbetti's 'evolution' of the store network a net 20 closures were completed over the year, with seven in the final week of the year perhaps holding back some of the growth recently reported by other luxury rivals.

Other strategic changes included "tighter, more productive collections" that have attracted new customers as well as current top-tier clients, retail improvements including a new digital 'clienteling' tool and a "transformation" of the leather goods range in the latest Spring collection with new handbag launches and "a roadmap" of further leather launches to come.

Around the world, Asia grew at a high single digit percentage as Chinese retail sales slowed in the second half against a strong prior year and Hong Kong improved through the year, while Europe declined in the second half as the UK also found it tough to repeat a strong prior year. The Americas grew at a low single digit percentage thanks to an improved performance in the second half, as the US returned to growth.

Adjusted diluted earnings per share grew 6% at the reported level to 82.1p, or up 10% at CER, to beat the City consensus of 80p after the repurchase of 20m shares and a slight reduction in the effective tax rate.

With exceptionally strong free cash flow of £484m up 4% thanks to a one-off inflow linked to the switch of Burberry Beauty from a wholesale to a licencing model, net cash swelled to £892m by year end. This enabled the board to declared a 6% hike in the full year dividend to 41.3p per share as well as the share buyback.

The new financial year has begun with trading in line with guidance issued in November, for "broadly stable" revenue and operating profit margin, with cumulative cost savings rising to £100m, which analysts had translated into a forecast for adjusted operating profit of £413m.

Having hired former Givency protege Riccardo Tisci as his new chief creative officer as well as poaching Belstaff's CEO to be his new commercial chief, Gobbetti said "we are excited about the year ahead and remain fully focused on our strategy to deliver long-term sustainable value". Tisci's first collection will be shown in September 2018.

Burberry shares climbed almost 4% on Wednesday to 1,874.5p, still below levels last seen the day before Gobbetti launched his plan.

A better wholesale outlook was the "big positive" Berenberg said, with luxury accounts responding well to the appointment of new creative director Ricardo Tisci. "This is important as bears have been arguing that worse than expected wholesale performance would be the reason for company’s outlook being unachievable."

The buyback and good cost control were two big ticks for Berenberg, with the only remaining box to be ticket being the new collection from Tisci in September, "to see the potential positive impact on LFL performance from his creative vision for the brand".

The analysts said: "Comments from [chief operating and financial officer] Julie Brown around the response from wholesale accounts on the appointment of Mr Tisci are positive in this regard. For investors looking for turnaround names, we believe that Burberry offers one of the most exciting restructuring stories in the luxury goods sector."

BoA Merrill Lynch said that the fourth-quarter LFL store sales growth of 2% was well below luxury sector peers but line with consensus. With shares trading for 23 times 2019 EPS, a 30% premium to history, the analysts reiterated their 'underperform' rating but increasing the price objective to 1600p from 1500p driven by an FX upgrade.

"Given limited visibility over the timing and quantum of a potential brand turnaround, we see Burberry's 30% premium valuation to history as unjustified."

Overall, the results and guidance should prove reassuring to the market, said Morgan Stanley, with analysts taking comfort in the fact that final quarter spending of both US and Chinese nationals improved sequentially, that average unit retail turned positive partly as a function of the key growth avenue of leather bags and that wholesale was a touch better than expected by the market, driven by higher in-season orders.

"While the bears would argue that Burberry's top line growth remains anaemic in an otherwise very strong luxury market (particularly given that Burberry is generating ~40% of its sales with the industry growth engine: Chinese nationals), Burberry's results are nevertheless a touch above market expectations."