Burberry sales fall less than feared but challenging conditions remain

Declines across all three of Burberry Group's regions led to a 3% like-for-like drop in retail sales in the first quarter, which was less than the 5% fall the market had forecast, though the luxury retailer warned its market remain challenging.

The FTSE 100 fashion group said it still expected low single-digit percentage growth in total retail revenue for the full year, but said it expects first-half wholesale revenue to be down by over 10% and full year licensing revenue will be down by about £20m due to cancellation of the Japanese agreement.

Directors continued to expect 2017 adjusted profit before tax will be more weighted to the second half than in the previous year, but it was calculated that there would be a £90m benefit from currency rates if they remain at current levels, up from the circa £50m foreseen at April's rates.

In the wake of board changes announced on Monday, including chief executive Christopher Bailey's replacement in the top role by Céline boss Marco Gobbetti in order to focus solely on the role of chief creative officer, the company is now in a position to begin its £150m share buyback programme this financial year.

In what remained a challenging external environment, underlying retail sales were flat in the first quarter," Bailey said, pointing to retail revenue being unchanged at the underlying level at £423m, indeed rising 4% at reported exchange rates.

"In this context, we continue to focus on managing our business with agility whilst implementing the ambitious evolution of our strategies and ways of working we outlined in May, to position Burberry for long-term growth. These plans are now well underway and on track to deliver our financial goals."

Looking at the performance by region, Asia Pacific was up if excluding Hong Kong and Macau. Hong Kong was said to have shown some improvement compared to the fourth quarter, but continued to see a double-digit percentage decline in comparable sales, whereas LFL sales in mainland China were broadly unchanged year-on-year.

The UK delivered mid single-digit percentage growth thanks to improvement in the final weeks of the quarter, though continental Europe remained depressed, with double-digit declines in sales to travelling luxury customers, in particular in France and Italy, offset in part by growth from domestic consumers in all major markets.

Spending by the 'travelling luxury customer' in the Americas continued to be down by a double-digit percentage, while domestic demand remained "uneven".

Analysts felt the performance was soft but a touch better than expected.

Acknowledging that Burberry shares may benefit from further GBP weakening post Brexit, RBC Capital Markets said it remained fundamentally concerned with the current top-line weakness in retail and US wholesale.

"A great brand like Burberry does not always make a great investment and digital leadership has not been a silver bullet to superior financial performance. In fact, we believe that Burberry has a lot of work ahead to improve customer retention/loyalty, reduce its dependence on the Chinese cluster and focus more on local consumers, which may take time and require further investment into product/communication."

RBC added that it felt the benefits should only come gradually from the multi-year cost savings program announced last month, with material upfront cash costs, but that rising cash returns "may provide support but they are not enough to drive stock outperformance, which depends on retail LFL growth returning to positive territory in order to avoid further opex deleverage pain".

Steve Clayton at Hargreaves Lansdown declared his fondness for Burberry on a long term view, seeing "plenty of potential", but felt it "could take a while for the good news to outweigh the bad".

He said that Burberry seemed to be "really suffering from the wider reluctance of Chinese tourists to spend like they used to. The challenge posed by this is clearly worsening and whilst the group is promising cost cuts and a share buy-back, there is little to get excited about in the near term".

Shares in Burberry led the FTSE 100, rising more than 5% to 1,264p, their highest level in over two months.