DK88 might sound like a retro foreignlanguage television drama, or perhaps a branch of the Danish secret service. It is, in fact, a £1,400 Burberry leather handbag. On such products depend the immediate prospects of the UK luxury group as a new chief executive takes the helm.
Growth, or the lack of it, is the main issue facing Marco Gobbetti, who takes over in July. Full-year results released yesterday show why. Underlying sales fell 2 per cent. Even in retail, samestore sales at constant exchange rates rose only 1 per cent. Full-year sales at LVMH’s fashion and leather division were up 4 per cent while at Gucci, the sector’s favourite recovery story, they rose more than 12 per cent.
The sluggishness has been masked to some degree by sterling’s postreferendum weakness, but that tailwind is fading. The recent recovery in the pound, if sustained, will knock £30m off next year’s forecast profits. The impact on earnings per share will be largely offset by a £300m extension to the share buyback.
The good news for Mr Gobbetti is that nothing is intrinsically wrong with Burberry. It generates stacks of cash — even after dividends and other outgoings, £149m was added to the £660m net cash pile in the year to March. It is already cutting costs to improve profitability; the latest initiative, moving back-office staff from London to Leeds, will help drive savings to £100m a year by 2019. Burberry is focusing on improving productivity rather than opening new stores. Doing a licensing deal for beauty products with Coty in April was sensible; the US company has the scale and marketing needed for that sector.
But with such low-hanging fruit already picked, the bad news is that Mr Gobbetti might have to take some risks on the creative front to reinvigorate sales. A frank conversation about design direction with Christopher Bailey — currently chief executive but returning to a more creative role in July — should be high on his agenda.
The problem for investors is that much of any upside is already in the price. Based on 2018 forecasts, Burberry shares trade more or less in line with the sector average. True, there is always the prospect of a bid, and a big cash pile could fund more returns to shareholders. But with sales growth more exciting at rivals, the DK88 is going to have to fly off the shelves to justify the current rating.