Burberry profits fall, but China demand recovers
Burberry said on Friday that it's made “strong progress” on its strategy and is well prepared to navigate through the current pandemic as it delivered its preliminary results for the year to March 28. But the firm still cut its annual dividend as it reported sales and profits down for the 12 months, with Q4 understandably seeing a revenue plunge and the current Q1 set to be weak as well.
Yet the results showed the firm “delivering strong momentum across our brand and product, with sales ahead of our expectations” before the Covid-19 crisis hit and also determined to continue its transformation strategy in the changed, post-Covid, world. Importantly for this aim, CEO Marco Gobbetti said the company has “a strong balance sheet and liquidity, with space for investment when markets recover”.
Also key is that he added the brand has “found new ways to strengthen our connection with consumers, drawing on our digital leadership. It will take time to heal, but we are encouraged by our strong rebound in some parts of Asia and are well-prepared to navigate through this period”.
So what exactly happened in the last year? On a pro forma basis, revenue fell 3% to £2.633 billion (-4% at constant exchange rates). Also on that pro forma basis, adjusted operating profit was down 8% at £404 million and reported operating profit plunged 63% to £160 million. Pro forma pre-tax profit fell 63% to £165 million and adjusted pre-tax profit was down 7% to £410 million. Adjusting items of £245 million were predominantly due to store impairments and stock provisions relating to Covid-19 resulting from its expected impact on future cash flows.
That all made the impact of the coronavirus crisis very clear, as did the fact that comparable sales in Q4 fell as much as 27% with around 60% of the company’s retail stores closed at the end of March. This compared to a 4% increase on the same basis for the first nine months of the year and an overall fall of 3% for the year.
In revenue terms, most of its losses in February were in Asian markets. At peak, most stores in Mainland China were closed and the rest operated with reduced hours amid “very significant” declines in footfall. Towards the end of the year, trading in Mainland China started to improve with the reopening of all stores, but footfall in other parts of Asia, including Hong Kong, remained “materially weaker”.
EMEIA and the Americas also suffered “very significant losses in the last three weeks of the year”. By the end of March, in line with government guidelines, all stores in these regions were closed with only digital open for trading.
The firm also saw disruption across its supply chain. The leathergoods ‘centre of excellence’, Burberry Manifattura, and its trench coat factory in Yorkshire, both closed in March. It also shut its major global distribution centre in Italy, with its American and UK logistics hubs operating on reduced hours to service the digital business.
On the plus side, the company said it had been tracking above its expectations before the crisis and it saw double-digit growth in followers and engagement on social platforms year-on-year, which continued throughout the crisis. And in the new financial year, sales in Mainland China and Korea are already ahead of the prior year and continuing to show an improving trend.
But it still expects Q1 to be “severely impacted with store closures likely to be at or near peak for most of the quarter”.
The company said “we are leveraging our digital platforms to forge stronger connections with our customers and have mitigation plans to conserve cash and reduce operating costs, whilst retaining flexibility to respond rapidly and optimise revenues in markets as they start to recover”.
Putting aside the current crisis for awhile – if that's possible – Burberry is on a long-term journey to transform itself and prior to the pandemic it was working.
The strategy to move even further upmarket, with a greater emphasis on leather and accessories, means it’s positioning Burberry "towards the more resilient and fastest growing segments of the luxury market”. And the company said that "over the last two years we have successfully established a foundational platform from which to leverage the brand over the coming years. This includes a new, desirable product assortment, better aligned distribution channels and improved brand perception. In light of the current environment, our strategy to secure our position in luxury is key”.
In the past year, it increased the availability of new product in its mainline stores from 10%-15% to around 85%. Prior to the pandemic, “the consumer response was very positive” with all new collections “delivering double-digit growth in our own stores. We also delivered growth in sales to luxury wholesale partners compared to the prior year”.
And it added that the SS20 campaign “generated online reach over three times higher than the previous season”. In February, its AW20 show, Memories, generated a global press reach of 230 million, up in double-digits compared to its AW19 show.
The company also increased “brand heat”. Its dedicated Lunar New Year campaign “drove industry-leading reach and engagement across social media platforms". And it said that after restrictions eased in Mainland China in mid-March, “we live-streamed an event on T-mall with influencer Yvonne Ching browsing our Shanghai Flagship store, which attracted almost 1.4 million viewers. In total, our inspiration activations led to strong double-digit year-on-year growth in followers and engagement on Instagram and WeChat”.
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