The shares plunged Thursday in response to a downbeat trading statement. One key problem was the weakness of sales in the final quarter through March. Like-for-like retail sales fell 5% year-over-year as Chinese shoppers avoided Europe.
Securities worries on the continent following the Paris and Brussels attacks haven’t helped Burberry. But growth in Chinese spending, which accounts for some 40% of Burberry’s sales, is slowing in any case. One bright spot is Japan, which has lately become a destination of choice among Chinese tourists. But Burberry is underrepresented in the country as it reverses a historic strategy of licensing out its brand.
The U.S. wholesale business is partly to blame. Faced with slowing sales and ballooning inventory, department stores such as Bloomingdale’s and Nordstrom are clamping down on their orders of Burberry scarves and trench coats.
Importantly, the company’s bearish guidance excludes the impact of a “productivity and efficiency” plan due to be announced alongside annual results in May.
But it won’t be easy to cut costs. Burberry started clamping down on discretionary spending when the market deteriorated last summer, and saved £25 million against plan all-told. Rent increases are fixed, and some wage inflation is unavoidable. Chief Designer and Executive Chris Bailey ringfenced marketing last year, and seems unlikely to risk any damage to the Burberry brand he has so successfully nurtured.
Nor should investors expect a cash bonanza. As Burberry has built up its retail store estate in recent years, it has accumulated nearly £1 billion in lease liabilities. The £459 million of net cash on its balance sheet looks good but doesn’t tell the whole story.
Burberry’s valuation has suffered in recent years and the company now trades on 18 times earnings—in line with the embattled luxury sector. But May’s efficiency plan may underwhelm, and luxury spending shows little sign of rebounding. It is no time to bet big on Burberry.