Burberry plans to cut discounting despite hit to revenues
Luxury retailer is determined to retain brand strength after attracting new customers in China, South Korea and US
Burberry is planning to reduce markdowns on its bags and clothes, betting that sacrificing short-term income to retain a stronger brand will help lift profits that have suffered in the wake of the pandemic.
The British luxury retailer on Thursday warned of a hit to revenues in the second half of its financial year, as it prepared to unwind discounts, despite lockdowns in Europe forcing roughly 10 per cent of its stores to shut.
“With the brand resonating and attracting new and younger consumers, we have taken the decision to reduce markdowns,” the company said. “This will be a revenue headwind [the second half of this financial year] but will serve the long-term interest of the brand.”
Burberry’s clearance sale will now feature fewer products, start later and last for a shorter duration of time.
Julie Brown, chief operating and chief financial officer, called the move an “opportunity to strengthen the brand” following strong demand from new consumers in the past few months, particularly in China, South Korea and the US.
Strong trading in the three countries helped the brand’s comparable store sales improve and return to growth in October, after sagging as much as 45 per cent in the quarter covering the spring.
But the uptick in demand failed to offset low sales throughout the pandemic, with Burberry badly hit as it relies heavily on in-store sales and international tourism. Pre-tax profits were down 62 per cent to £73m in the six months to September, compared with the same period last year. Sales dropped 31 per cent to £878m.
Investors were nevertheless reassured by the company’s announcements, which included a plan to review currently suspended dividends at the end of the financial year. Burberry’s share price, which is down more than a quarter since a peak in January, rose more than 3 per cent on Thursday morning.
Ms Brown said Burberry was now facing a triple whammy of the pandemic, Brexit and the UK government’s recent decision to scrap value added tax relief for overseas visitors.
Roughly two-thirds of the brand’s sales in the UK were made to foreign visitors, she said, adding that “tourists may now go into other European cities where they can reclaim the VAT”.
“Burberry may still pick up consumers overseas but the UK might lose the business, which is important also to hotels and restaurants,” she said.
Ms Brown added that if no Brexit deal was struck, the company was expecting to pay additional duty in the “low tens of millions”.