The protests in Hong Kong may have clobbered sales growth in the all-important third quarter, but Burberry has remained defiant, raising its revenue guidance for the full fiscal year and sticking by its restructuring plan.
The stock market wasn’t so optimistic, though, sending Burberry’s shares down 5% on Wednesday to close at 21.50 pounds ($28.23).
Hong Kong, which generated 8% of Burberry’s sales last year, contributed just 4% in the third quarter due to a decline in mainland Chinese tourists and temporary store closures from the ongoing protests.
Retail revenue was 719 million pounds in the three months to Dec. 31, with growth slowing to 1% at reported rates and 2% at constant exchange.
In the first half, revenue was up 5% at reported rates and 3% at constant exchange.
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Last year’s numbers should have been easy to beat: During the corresponding period in 2019, Burberry’s retail revenue fell 1% at reported exchange rates and 2% at constant ones.
The third quarter’s 1% growth came from products designed by chief creative officer Riccardo Tisci, in particular his latest collection of sneakers, which saw double-digit growth, and from full-price sales.
Part of Burberry’s strategy has been to push full-price merchandise, keep inventories tight and discounted sales to a minimum.
Tisci’s new styles account for 75% of the Burberry main-line retail offer. By the end of fiscal 2019 to 2020, which ends on March 31, that figure will rise to 80%.
Worldwide, same-store sales growth was 3%, compared with 1% in the previous fiscal year. The 3% figure was in line with consensus.
Asia-Pacific grew by a low single-digit percentage driven by mainland China, which was up in the mid-teens, while sales in Hong Kong halved. Tourist spending boosted sales in the Europe-Middle East-India-Africa region, with Continental Europe in particular benefiting from tourist spending.
The Americas were flat year-over-year, with the U.S. growing by a low single-digit percentage, partially offset by Canada.
Despite the falloff in Hong Kong and brewing problems in Mainland China from the coronavirus, Burberry has raised its revenue guidance, saying it expects full-year revenues to grow by a low single-digit percentage at constant exchange, compared to previous guidance of “broadly stable.”
Adjusted operating margin is expected to remain broadly stable at constant exchange, despite the impact of disruptions in Hong Kong. For the full fiscal year, cumulative cost savings will be 125 million pounds ($164.2 million), ahead of the 120 million pounds originally forecast.
During a call Wednesday, chief operating and financial officer Julie Brown said Burberry was able to raise guidance because of strong demand in mainland China and the EMEIA region; Burberry’s ability to offset the decline in Hong Kong with growth in other regions; and “a strong response from wholesalers” to Tisci’s collections.
She added that despite the challenges unfurling in China, the company believes the country will be the greatest contributor to luxury growth in the medium term.
Spending by Chinese consumers globally generates 40% of Burberry’s sales.
Asked about the potential spread of the coronavirus in mainland China and worldwide, Brown said she was “very sorry to hear about the virus and the families affected. We are keeping the situation under review at this point and monitoring it closely.”
She added that Burberry has not closed any stores in Hong Kong and that the company was “very much focused” on rent negotiations and working in collaboration with landlords. She said it was engaging with Hong Kong staff and partners “day to day, week to week.”
Brown believes it was a “considerable achievement” that Burberry was able to raise guidance in the face of “major macroeconomic” challenges. “We’re confident in our strategy, and we’ve seen a very good performance from Burberry in the quarter.”
Analysts were not as enthusiastic about the third-quarter performance.
Royal Bank of Canada said it remains “somewhat cautious” on Burberry’s 2021 and 2022 fiscal years, when the company is set to return to growth.
“The business plan needs to show meaningful acceleration in revenue growth (plus 5% to 6% retail like-for-likes) and margin expansion in the absence of material cost savings,” wrote RBC’s Piral Dadhania in a note following the results.
The bank said its overall view is that Burberry management has made good progress in building the foundation to revitalize the brand.
“But Burberry is now up against a less favorable external/competitive backdrop at a time when it has to show the market that it is on track to significantly accelerate top-line growth and expand margins from 2021 onward. Brand heat is improving, but we are unsure that it is strong enough to take market share from the sector winners.”
Analysts at Bernstein said Burberry’s improvement remains “modest,” and the company will soon start to come up against difficult comparatives from previous quarters. He also said a stronger pound following an orderly Brexit on Jan. 31 will likely work against the company as the bulk of Burberry’s business is done abroad.
Meanwhile, China remains top of mind at Burberry: At the end of December, the company launched its Lunar New Year campaign, and as reported, preparations are under way to take the fall 2020 runway show to Shanghai in April.
The brand will also open its first social retail store in Shenzhen, in partnership with Tencent, in the first half of the next financial year.
This story was reported by WWD and originally appeared on WWD.com.
