If not for Brexit, Burberry would be in even bigger trouble

Great quarter, guys.
Great quarter, guys.
Image: Reuters/Neil Hall
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Needless to say, this is not a good look for Burberry:

The plunge in the British luxury house’s share price seems puzzling at first, since the group reported a solid 5% rise in sales in its fiscal first half today (Oct. 18). But much of that gain is down to the weak pound. Sales outside of the company’s home market are worth more when converted into sterling, which has fallen by 18% against the dollar since the UK voted to leave the EU in June.

Excluding these currency effects, Burberry’s underlying sales fell by 4% in the six months to September. And this masks some truly worrying trends in key growth markets. Sales fell in both the US and Hong Kong, dragged down by double-digit percentage declines in purchases by wealthy tourists to those places. (Burberry’s sales are split roughly equally between Europe, Asia, and the Americas.)

This isn’t a problem in the UK, where everything is suddenly on sale for foreign visitors. Sales at Burberry stores in Britain jumped by more than 30% over the past six months. An uptick in spending on fancy bags and coats by visitors from China, the US, continental Europe, and the Middle East all contributed to the growth, CFO Carol Fairweather said on a conference call.

Around 40% of Burberry’s costs are incurred in Britain, versus 15% of its sales. This difference makes the Brexit-fueled drop in the pound a major driver of reported profit for the group—despite today’s drop, Burberry’s shares are up by nearly 30% since the referendum. Currency effects alone are expected to boost the company’s full-year profit by some £125 million ($153 million), Fairweather said. The company made just over £300 million in its last fiscal year.

As grim as the outlook is for the pound, getting lucky with currency values isn’t a sustainable strategy—indeed, underlying sales at company-owned stores were flat or down in the four quarters before the most recent one. The brokers who updated their ratings after the earnings update today all rate the company a “hold” or “sell.”

Burberry isn’t standing still—it plans to cut annual running costs by at least £100 million over the next three years and reported enthusiastic take-up of its innovative “see now, buy now” approach to its latest runway collection. A revamp of its website last month, and development of a new mobile app, are intended to keep the luxury digital pioneer ahead of its rivals, who have been catching up with it online.

To cap it all off, the group is also replacing its CEO and CFO next year—suits, the hot new look for spring!—who will probably perform their own makeover of the storied brand. Incoming CEO Marco Gobbetti of Céline is a luxury industry veteran, but CFO Julie Brown comes from the medical device-maker Smith and Nephew, with earlier roles in chemicals and pharmaceuticals. Admired for her restructuring expertise, part of Brown’s responsibilities includes “business transformation.”