Burberry: check it out
The British fashion house looks well-placed to ride out the pandemic in style
When staging a turnround, timing matters. After two years of preparatory slog, Burberry boss Marco Gobbetti expected sales and profits to be accelerating by now. The pandemic, which has forced the British fashion house to close half its stores, has changed all that. On Friday, it passed its dividend and warned the first quarter would be severely hit.
The luxury industry is expected to lose as much as a third of its sales this year. Given that, the company struck a confident pose. The share price rose by as much as 5 per cent at one point on news that April sales in China and South Korea had bounced back. Those figures were flattered by the repatriation of tourist spending. Half of its Chinese clients normally buy abroad. Even so, it shows designer Riccardo Tisci’s “classic meets eccentric” vibe is getting traction.
Burberry boasts it is well prepared to navigate the coronavirus crisis, and not just because it retooled its Yorkshire factory to make medical gowns. It has enough liquidity to cope with prolonged store closures — £1.2bn in all, including £300m from the government’s commercial paper scheme.
The drop off in fourth-quarter sales led to an 11 per cent increase in inventories, one reason why free cash flow slumped to £66m from £301m last year. Still Burberry can draw comfort from its reduced reliance on wholesalers, now accounting for 18 per cent of sales, down from 50 per cent five years ago. That gives it more control over its unsold clobber, limiting the risk of damage to the brand.
The shares may have spent long enough on the discount rails. They are down 35 per cent this year, more than twice as far as sector leader LVMH. Much depends on the Chinese consumer who is expected by Bain to account for half of luxury purchases globally by 2025. She already accounts for 40 per cent of Burberry’s sales, higher than the sector average. If Burberry can build on that, its turnround will only be delayed, not derailed.