Burberry: hand­bagged

Financial Times USA - - COMMENT -

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.

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