Burberry sales stumble but Gobbetti confident with new direction

Sales of £719m in what is the FTSE 100 group's third quarter were down 2% on a reported basis, but up 1% at the underlying level and up 2% on a like-for-like basis, though this was still short of the analyst consensus of 3%.

Sales in the Europe, Middle East, India and Africa region dropped, dragged down by the UK's "high single digit percentage" fall compared to a quarter the previous year that had been boosted by tourist inflows amid the pound's post-referendum fall.

Asia Pacific growth remained at a mid-single digit percentage, with mainland China slowing from mid-teens to mid-single digit as promotional activity was reduced and Hong Kong broadly unchanged, while Americas grew by a low single digit percentage, with US revenue broadly flat.

Chief executive Marco Gobbetti, who joined last year from Celine and two months ago launched a new strategic plan to move further upmarket in search of stronger profit margins, said "good progress" was being made in rolling out the plan throughout the business, which remained "on track" to meet the full year profit target and generate plenty of cash, helped by cost savings of £60m this year.

"We are building on strong foundations and are fully focussed on the successful delivery of our multi-year plan to position Burberry firmly in luxury and deliver long-term sustainable value," he said.

There was no news on a replacement for longtime creative director and former CEO Christopher Bailey, who is scheduled to leave the board at the end of March, although he will provide support until the end of the year. Rumours have been abounding about the identity of his successor, including Celine's Phoebe Philo and former Givenchy man Riccardo Tisci.

Gobbetti did however point to creative collaborations across events, social and other media with the likes of model Adwoa Aboah, model turned actress Cara Delevingne, 'skater, designer and artist' Blondey McCoy.

There were little concrete signs yet of the new Gobbetti plan being put into effect apart from initial "engagement" beginning with wholesale partners in the US and EMEIA, reports of a "deeper, more personalised service" bringing back top-spending customers and some new products introduced across categories, while legacies of Bailey's digital push were seen in the piloting of a new digital tool for shop sales assistants.

Outside the CEO's control, recent tax reforms in the US, including a reduction in the US federal rate of corporate income tax, are expected to result in an initial one-off, non-cash tax charge of £10-15m in the current financial year due to a revaluation of the group's aggregate deferred tax assets and liabilities in the country, though this will not impact adjusted earnings per share. On an ongoing basis the effect is only expected to be "very marginally positive".

Burberry shares fell almost 8% in the first hour of trading on Wednesday to levels seen last July, having come off more than 10% from November's high.

UBS noted the lack of a new creative appointment and that retail sales were 3% short of the consensus forecast, with LFL sales in EMEIA decelerating more than expected.

Analyst Mike van Dulken at Accendo Markets reminded investors that November's turnaround plan had accompanied an "ugly profits warning" that margins are not expected to grow until 2021.

"Reiteration of FY 2018 profits guidance looks like a failed attempt to curry favour with investors who have already seen the shares rally 28% post-referendum, only to drop 15% in November and struggle for traction since. In fact, today’s breakdown may have triggered a bearish flag towards last year’s lows of 1,545p," van Dulken said.

"Quoted savings of £60m are always good to hear and will help margins, however, this just isn’t cutting it. Growth led by Asia Pacific is also a positive given the growing affluence of the demographic. However, mobile representing 40% is an issue for a brand that sits somewhere between fashion and luxury. Online helps boosts sales and margins, but can weaken image. The brand also loses its lustre without an expensive bricks-and mortar presence."

It was a "steady-as-she-goes" performance, said market analyst Richard Hunter at Interactive Investor, with the company flagging some small early wins, the operating margin still comfortable and the share buyback programme supportive.

He noted that news of Gobbetti's transformation had dragged on the share price. "The intentions of the company are well understood, with the market consensus of the stock as a strong hold representing an element of patience in awaiting the roll out of the strategy.”