Burberry Downgrades Profit Projections in What’s Set to Be Lackluster Year for Luxury
This story has been updated.
LONDON – Burberry’s Christmas wasn’t a merry one, with sales declining in key markets and a lump of coal, in the form of a profit downgrade, in its stocking.
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The brand, which released its third-quarter trading update a week early, said adjusted operating profit for the 2024 financial year ending March 30 will land somewhere between 410 million pounds and 460 million pounds, below previously stated guidance.
In November, Burberry had already warned that full-year profits would be lower due to a wider slowdown in demand for luxury goods worldwide. The company had said adjusted operating profit would be at the “lower end” of a consensus range between 552 million pounds and 668 million pounds.
Despite the expectation of lower profits in these dark days for luxury, chief executive officer Jonathan Akeroyd said he was confident that Burberry could reposition the brand under designer Daniel Lee, whose first runway collection began landing on the shop floor last September.
Akeroyd is also convinced that Burberry will reach its medium-term goal of reaching 4 billion pounds in revenue, but acknowledged the wider economic backdrop would make the task more challenging.
“Clearly luxury demand has slowed, but we are still in the very early stages” of the repositioning, he said. “It’s very early days, and we have a long way to go. We’re focused on execution, and we’re very confident in our strategy.”
On Friday, following the downgrade, RBC Capital Markets said it viewed Burberry’s mid-term revenue target of 4 billion pounds and projected margin of 20 percent as “optimistic, at this stage. Our estimates are materially below these levels” by fiscal 2028, the bank said.
Luca Solca of Bernstein was also pessimistic. “There did not appear to be an obvious bright spot in the results, with European, Chinese, and American nationals all disappointing versus the company’s expectations,” he wrote.
Solca added: “The company hopes that footfall will improve, that the macro environment will become a little easier, and that Daniel Lee’s collections will spur a revitalization. This optimism does not appear consistent with the weakness seen in December. Alas, hope is not a strategy.”
Burberry’s share price closed down 4.8 percent to 12.96 pounds.
Akeroyd also shed light on consumer spending in the third fiscal quarter, which ended Dec. 30.
He said demand from European locals was “disappointing” in the key third quarter, while America is “still challenged.” He added that, in the region, the dwindling appetite for luxury goods had begun to spread beyond the aspirational consumer.
Traffic in China, he added, was still soft, with Burberry witnessing a “deceleration” in sales in December.
Akeroyd noted that Lunar New Year starts on Feb. 10, three weeks later than in 2023. That timing might have had an impact on Chinese consumers’ reluctance to splash out at Christmas.
On a brighter note, Chinese consumers have begun to trickle back to Europe, and now represent 8 percent of shoppers in the region. But that is still well below pre-pandemic levels.
Asked about Burberry’s pricing strategy, Akeroyd said the brand would continue to align itself with its luxury peers as part of its overall repositioning. In terms of prices, he said “we’re confident about where we are at the moment,” and that Burberry had no plans to lower prices in response to the slowdown in demand.
Retail revenue in the third quarter was down 7 percent to 706 million pounds at reported exchange rates. At constant exchange, it fell 2 percent.
Comparable stores sales were down 4 percent, a larger drop than the banks had anticipated.
Consensus estimates were for a 3 percent decline, while Barclays said it was expecting a 2 percent drop. The banks had expected Burberry to perform better in China, given easier comparisons with the corresponding period last year.
In Asia Pacific overall, comparable store sales were up 3 percent. Specifically, Mainland China rose 8 percent; Japan 9 percent, and South Asia Pacific 2 percent. In South Korea, sales were down 10 percent.
In the EMEIA region, which comprises Europe, the Middle East, India and Africa, sales were down 5 percent. In the Americas they dropped 15 percent.
Burberry’s profit downgrade, and snapshot of tepid demand for luxury in the runup to Christmas, dovetails with analysts’ projections for the sector over the next year.
On Friday, Jefferies released a report called “The Asperity Of Prosperity,” which believes the upcoming reporting season will “highlight the risk of another year of U.S. normalization; ongoing weakness in Europe, and the possibility of a limited boost from travel to Chinese spend.”
Based on data from December, Jefferies argued that the U.S. market has entered “a second year of normalization” with regard to luxury spend, and that Chinese consumers are exercising greater caution in their purchasing.
Jefferies added that its own previous assumption of a 13 percent uptick in Chinese spend due to travel recovery in 2024 now looks “optimistic.”
As reported earlier this month, luxury brands and retailers are bracing for a challenging 2024 as aspirational consumers worldwide continue to pull back on spending in what remains an uncertain macro-economic climate.
With wars grinding ahead in Ukraine and the Middle East, and with the U.S. and the U.K. headed to the polls later this year, consumers are — understandably — anxious, and ever more cautious about spending.
With interest rates still high and questions swirling about the Chinese consumer’s appetite for luxury, analysts have been conservative in their outlook for 2024.
Barclays said it’s keeping a “cautious view,” and believes the normalization of the luxury market should “fully materialize” in 2024. It has also warned that some brands could experience “negative growth” due to the slowdown in consumption and tough comparisons with the first half of 2023.
HSBC gave its 2024 outlook the cheery title of “Goodbye Stellar Growth” and said the normalization in the sector could stretch into 2025.
“Following three years (2021 to 2023) of exceptional growth linked to revenge buying in almost all regions after the reopening post COVID-19, we are now expecting a return to normalized growth in 2024 and 2025,” the bank wrote.
HSBC said it is expecting 8 percent average growth for the companies it covers for 2024 and 2025, compared with 35 percent in 2021; 15 percent in 2022, and 11 percent in 2023.
Altagamma and Bain & Co. said in a joint report they are anticipating “softening personal luxury goods performance in 2024,” with low-to-mid single-digit growth over 2023, based on “fragile consumer confidence, macroeconomic tensions in China, and sparse signs of recovery in the U.S.”
Overall, analysts believe it will be a lackluster year for the big brands, with organic growth projections ranging between 4 percent and 8 percent, and sales weighted toward the second half of 2024.
A large chunk of that growth will come from Asian markets, while demand in the U.S. and Europe is expected to be flat. The outlook for Chinese demand is uncertain.
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