REVENUE WORRIES
Heavy reliance on Asian shoppers exposes fashion brand Burberry to chilly market conditions,
It isn’t an easy time for companies that depend on selling expensive products to Chinese consumers.
Trench-coat maker Burberry is particularly exposed to the chill winds blowing from Asia, even by the China-centric standards of the European luxury sector. Chinese shoppers contribute roughly two-fifths of Burberry’s revenue globally, and many of them buy their products in protest-ridden Hong Kong.
The stock was immune to investors’ wider worries about China until this month, when the whole sector was hit by President Trump’s announcement of a 10% tariff on an additional $300 billion of Chinese goods followed by China’s decision to let its currency devalue.
Even now, after a 10% fall in the month to date, Burberry stock appears expensive on 23 times expected earnings—onetenth above its five-year average.
The brand is a little over midway through a multiyear makeover. Last year Chief Executive Marco Gobbetti hired a new lead designer, Riccardo Tisci, best known for his work at Givenchy. The hope is that the new creative approach and a better handbag range—a more lucrative category than clothing— can lift Burberry’s comparatively low 16% operating margin.
But investors have gotten carried away. Burberry’s shares have recently been pricing in sales growth of 5% to 6% in the second half of the company’s financial year, which runs through March, according to calculations by Bernstein. Meeting these high expectations will be tough. An immediate problem is weak spending in Hong Kong, where antigovernment demonstrations are stretching into their 10th week. A dozen or so boutiques in the city account for 6% of Burberry’s revenue.
Moreover, the brand is more reliant on Asian spenders than its rivals. For the quarter through June, sales in Europe were driven by tourists rather than locals, while business in its Americas region was flat. As the brand is still removing products from less salubrious department stores in the U.S., growth there should remain subdued. So while signs that Mr. Tisci’s new collections are going down well with Chinese shoppers are positive, Burberry has little to fall back on if they tighten their belts. Granted, China’s luxury spenders have proven to be a resilient lot so far this year, despite the wider slowdown in consumer demand for massmarket goods like electronics in the Chinese market. But this could change as the weaker yuan makes European luxury goods more expensive. The current Sino-American trade tensions are unpredictable—on Tuesday the U.S. delayed the introduction of its latest tariffs— but at some point they seem likely to take a toll on the consumer confidence of China’s elite.
Burberry’s stock, which hit a record high last month, is still priced as if Chinese shoppers could be taken for granted. Investors’ optimism may have only just started to sour.