Burberry banks on more bags and online sales

May 18, 2016 12:57 PM

Burberry Group Plc on Wednesday unveiled a multiyear turnaround plan based on a narrower product range, its biggest cost purge in years and a sharper focus on bags and online sales.

The muted outlook increases pressure on CEO Christopher Bailey amid concern over whether he can lead the London-based luxury retailer effectively while doubling up as chief creative officer. The CEO, who faces a struggle to boost sales due to an over-reliance on an ailing Hong Kong market, said he plans “significant changes” to save 100 million pounds ($144 million) a year and will reduce the product range by as much as a fifth.

“Creating new demand has to be at the core of Burberry’s future strategy,” Paul Thomas, an analyst at consultant Retail Remedy, said by email. He called on the company to appoint “a commercially experienced heavyweight” to work alongside Bailey, joining a growing roster of analysts who think the CEO needs help.

“The external environment has remained challenging and underlying cost inflation pressures persist,” said the trenchcoat maker, which has been particularly affected by sliding demand in Hong Kong. Burberry is No. 356 in the Internet Retailer 2016 Top 500 Guide with estimated 2015 web sales of $59.2 million in North America. The retailers is No. 210 in the 2015 Europe 500, with an estimated $92.7 million in 2014 web sales.

Burberry plans to reduce its product assortment by 15% to 20%, chief financial officer Carol Fairweather said on a conference call. The company doesn’t plan to exit any categories, she said, adding that it is “moving from breadth to depth.” In bags, where the company’s sales trail peers, Burberry will increase marketing ahead of new product introductions next year.

E-commerce initiatives are expected to account for about another third of the retailer’s revenue growth during the next three years, Burberry said. The retailer, in the release Wednesday of its preliminary financial results for fiscal 2016 ended March 31, said it wants to grow through higher conversion, especially on mobile, and increasing e-commerce penetration, particularly in Asia, while “integrating and improving customer experiences across online and offline.” Burberry also plans to grow via third-party digital players and new channels, such as social commerce.

In fiscal 2017, will relaunch and the retailer will introduce a customer app that with mobile checkout and customer connectivity. Burberry also plans to further localize e-commerce sites in Asia, following its April relaunch in China.

Burberry does not break out e-commerce sales but said “digital outperformed during the year, delivering growth in all regions.” In the second half of fiscal 2016 Burberry rolled out its single pool of inventory model, tested in China in fiscal 2015, to stores across the United States, Europe, the Middle East, India and Africa. The fulfillment model allows digital transactions in 44 online countries to draw on inventory in regional distribution centers and store networks, with 75 stores live, and it has improved stock availability and contributed to digital growth, Burberry said.

In its preliminary results for fiscal 2016 ended March 31, Burberry reported:

  • Revenue of 2.51 billion pounds ($3.67 billion), down 0.4% from 2.52 billion pounds ($3.69 billion) in fiscal 2015.
  • Retail sales of 1.84 billion pounds ($2.69 billion), up 1.7% from 1.81 billion pounds ($2.65 billion).
  • Wholesale sales of 634.6 million pounds ($928.2 million), down 2.1% from 648.1 million pounds ($948.0 million).
  • Licensing revenue of 42.4 million pounds ($62.0 million), down 37.4% from 67.7 million pounds ($99.0 million).
  • Profit before taxation of 415.6 million pounds ($607.9 million) compared with 444.6 million pounds ($650.3 million).

Eliminating duplication

The company plans to achieve its new annual cost-saving target of $144 million by the 2019 financial year. Half of that will come from changes in the way Burberry works, by reducing complexity, simplifying processes and eliminating duplication. About 20 million pounds of costs will be taken out this year, the company said. One-time charges associated with the plan should total about 60 million pounds over the next two years.

Burberry also announced a share buyback program of as much as 150 million pounds, starting this year, and said it will hold its dividend per share for fiscal 2017 at least in line with 2016.

The trenchcoat maker expects global luxury demand to remain subdued, growing an average low single-digit percentage a year. “The majority of sector growth is expected to come from new and existing Chinese consumers, both when traveling and, increasingly, at home,” Burberry said.

Earnings for the year ending in March are likely to be near the bottom of the range of analysts’ predictions, London-based Burberry said Wednesday, only a month after giving a similar warning. Analysts reduced profit estimates by almost 10% and the shares fell as much as 4.4% to a four-month low.

Analysts predicting pretax profit at the high end of a range spanning 375 million pounds to 449 million pounds trimmed their estimates after the publication of results showing a second straight drop in annual earnings. The company’s guidance implies a downgrade of about 9%, said Rogerio Fujimori, an analyst at RBC Capital Markets.

Bloomberg News contributed to this report.




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