Burberry plunges after altering outlook on slower sales in second quarter

Burberry has scrambled to cut costs after sales slowed in the second quarter as the luxury market, particularly for Chinese customers, became "increasingly challenging".

Total sales were almost flat at £1.1bn in the six months to 30 September, with retail sales up 3% to £774m at the reported level and 2% underlying, but wholesale down 3% and licensing down 18% at the underlying level.

The interim revenue number was 5% below consensus forecasts, largely attributed to disappointing like-for-like sales, which fell 4% in the second quarter versus the consensus estimate of 5% growth.

Management has already moved to avert the effects on the bottom line, saying its "accelerated actions to control costs" were expected to minimise the impact on full year profit.

Shares in the fashion group plunged 12% in early trading on Thursday, their biggest fall in three years.

"The external environment became more challenging during the half, affecting luxury consumer demand in some of our key markets," said Christopher Bailey, chief creative and chief executive officer.

"In response, we have intensified our focus on driving sales and productivity, while taking swift action on discretionary costs."

Management now expect full year profit before tax to remain in line "with the average of those analysts who have recently updated forecasts", which is roughly £445m, but this relies on several conditions, including a return to a mid-single digit percentage growth in comparable sales in the second half, continued cost efficiencies, a cut in performance-related pay and a benefit of around £10m from exchange rates.

The main cause of the belt tightening is that Hong Kong retail sales decelerated further in second quarter, with demand from luxury consumers particularly Chinese customers being "affected by a more challenging external environment", leading a mid-single-digit percentage decline across the Asia Pacific region.

Mainland China comparable sales decreased slightly in the half, in the context of weakening consumer sentiment in the market in the second quarter. Excluding Hong Kong and Macau, comparable sales were broadly unchanged year-on-year in the first half.

For the six month period, Asia Pacific was hit by a 6% decline in underlying retail and wholesale revenue, which could not be counterbalanced by an 8% gain in Europe, Middle East, India and Africa and 6% in the Americas. The latter two regions were affected by a slower US environment and fewer tourists into the UK.

Optimism over second half

Bailey, taking heart from the outperformance from British-made trench coats and cashmere scarves and an excellent progress in Japan through the new flagship store in Tokyo and 16 additional concessions, remained optimistic about the key period to come.

"While mindful of this external volatility, our plans for the festive season position us well to return to a more positive sales trend in the all-important second half. Looking further ahead, we maintain our focus on - and confidence in - the long-term growth opportunities for our business across channels, regions and product categories."

Analysts at Nomura noted that "the focus will be on the Q2 LFL of -4%...consensus expectations had been in the range of +3% to +5%". This led it to make a small downgrade to its forecast, now estimating 4.1% LFL growth for the second half, adding: "but much depends on the macro backdrop".

On its calculations, around £50m of costs may need to be mitigated to preserve current consensus forecasts given the weak second quarter and outlook.

Bank of America Merrill Lynch speedily downgraded Burberry to a 'neutral' rating on the ongoing earnings downgrades and the lack of a near-term positive catalysts.

"While we do not question Burberry’s brand equity, strategy or execution, the trading environment is tough and only amplified by its geography mix. BofAML house view is that China risks remains skewed to the downside."