Burberry Issues Revenue & Profit Warning Faced with Luxury Demand Slowdown

Burberry H1 FY24 Results

The British high-end fashion designer reported on Thursday underwhelming results for the first half of fiscal 2024 (26 weeks ended September 30), amidst broader spending headwinds. High inflation and elevated interest rates in many parts of the world, along with faltering post-pandemic recovery in China, create a tough backdrop. China is a bellwether for the luxury market and Asia- Pacific is Burberry's main revenue generator. Alluding to the adversities, CEO Jonathan Akeroyd spoke of a macroeconomic environment that has become "more challenging recently". [1]

The Burberry Group (BRBY.uk) said that same-store sales grew by 10% in fiscal H1, but this was mostly thanks to the strong increase of the first fiscal quarter, as Q2 sales rose just by 1%. The growth slowdown in Q2 is concerning, especially as Mainland China dropped 8%. Americas was the worst performing region, since sales contracted in both fiscal quarters, amounting to 9% decline in the first half.

Total revenues saw a small bump of 4% y/y, to £1.396 billion. However, adjusted operating profits dropped 6% y/y, to £223 million and margin narrowed by 180 basis points, to 15.9%. The firm also reported negative cash flow of £15 million, partly due to inventory building for the holiday season and increased capital expenditures from the refurbishment of its stores.

Burberry expressed confidence in achieving its medium and long-term sales targets of £4 billion and £5 billion respectively, but warned it may not meet its FY2024 guidance as the "slowdown in luxury demand globally" is having a negative impact. If weaker demand persists, the firm is "unlikely" to reach the previous revenue guidance of low double-digit y/y expansion and adjusted operating profit would be towards the lower end of the £552-668 million projection.

Underscoring the broader soft demand, luxury giant LVMH Moët Hennessy Louis Vuitton (MC.fr) had taken note of an "uncertain economic and geopolitical environment" last month. Sales dropped sequentially in the July-September quarter, while the 14% y/y growth in the first nine months constituted a slowdown and its stock had dropped to 2023 lows after the report [2]. CEO of Gucci-owner Kering group (KER.fr) spoke of "challenging macroeconomic conditions and softening demand across the luxury industry" as the company reported a 9% y/y drop in comparable sales in the third quarter. [3]

Markets reacted negatively to Burberry's report and its stock drops more than 8% today, with the downgraded guidance standing out. China's economic hardships and fraught Sino-Western relations are another area of concern, given the firm's reliance on Asia-Pacific.

Furthermore, the British icon may be one of the most recognizable fashion brands in the world, but is a relatively small player compared to high-end behemoths like French-based LVMH and other conglomerates. This makes it more vulnerable to external adversities, but also leave it at a weak position against the consolidation in the luxury market. In one of the latest manifestations of this trend, Coach-owner Tapestry (TPR.us), agreed to acquire Capri Holdings, home of Michael Kors, Versace and other high profile designers. [4]

On the other hand, luxury goods are generally resilient to adverse macroeconomic headwinds and there are signs of improvement. Inflation is coming down in the US, Europe and the UK, while their respective central banks are close to the end of their monetary tightening cycles - if not already there. Despite the adverse environment, Burberry managed to eke out growth and China sales strengthened substantially in H1, despite the Q2 drop.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 15 Nov 2023 https://www.burberryplc.com/content/dam/burberry/corporate/Investors/Results_Reports/2023/november-interim-results/Burberry H1 FY24 Press Release 161123.pdf.downloadasset.pdf

2

Retrieved 15 Nov 2023 https://www.lvmh.com/news-documents/press-releases/organic-revenue-growth-of-14-in-the-first-nine-months-of-2023/

3

Retrieved 15 Nov 2023 https://www.kering.com/api/download-file/

4

Retrieved 24 May 2024 https://tapestry.gcs-web.com/news-releases/news-release-details/tapestry-inc-announces-definitive-agreement-acquire-capri

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