Share Hunter: Burberry sales still hurt by China’s slowdown
Burberry has successfully evolved from a manufacturer of iconic trench coats to a global luxury brand.
With a majority of sales outside the UK, the group is a major beneficiary of a weaker pound.
Sales measured at local currency rates were 4 per cent lower in its latest trading update, but because its international revenues are now worth more in sterling terms, the group’s reported revenue rose by 5 per cent to £1.16billion. Lower sterling is set to boost reported profits by about £105million for the year as a whole.
Sterling’s fall against major global currencies also makes a trip to a UK store cheaper for high-end tourists. Historically, a majority of UK store sales are made to measure for the travelling luxury shopper, rather than UK residents.
With the cost of the flights now justified by the saving on just a handful of Burberry’s premium products, the group is seeing a significant increase in luxury consumers taking advantage of the lower pound. UK sales were more than 30 per cent up in the half.
Unfortunately, the UK makes up a relatively small percentage of Burberry’s sales, and there is no getting away from the fact that conditions remain tough in its main markets. Following a period of rapid sales growth in the Far East, the tables have turned and Burberry has recently suffered from falling sales in China.
First-half like-for-like sales in the Asia Pacific region declined by mid-single digits, as did those in the Americas.
The group is clearly facing challenging times. A new CEO joins next year, and investors will hope that this will trigger a turnaround. Until then, there is little to get excited about, despite a cost-cutting plan and a share buy-back.
Expectations were very low for Burberry: SW Retail
Companies like Burberry can command high margins, and with wealth typically more durable than income, the customer base tends to be more resilient than most. With only 211 Burberry stores worldwide, there is plenty of scope for the group’s global expansion to continue when conditions improve.
While things look rough for the group now, conditions will not stay this tough forever. Provided that the brand’s image is managed well in the meantime, there is cause for optimism about the future.
“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”