Bloomberg News

Burberry Leads Luxury Stocks Lower as Revenue Growth Slows

September 11, 2012

Burberry Struggles Getting Top Price Chasing Elite Brand

A sign hangs above a Burberry shop in London. Photographer: Chris Ratcliffe/Bloomberg

Burberry Group Plc (BRBY) fell the most ever in London trading as the U.K.’s largest luxury-goods maker said full-year profit will disappoint after sales growth slowed globally, rattling the stocks of industry rivals.

“We know we are not alone in terms of what we’ve seen in the last couple of weeks,” Chief Financial Officer Stacey Cartwright said today in an interview, citing conversations with other luxury-goods makers. “Traffic is down.”

Burberry fell 21 percent after Chief Executive Officer Angela Ahrendts said the economic environment is becoming “more challenging.” Profit for the 12 months through March will be at the lower end of analyst estimates, the London-based company said, as sales at stores open at least a year were unchanged in the 10 weeks ended Sept. 8. The announcement was the second blow to investors in two months, after Burberry reported in July that sales slowed as licensing revenue slipped.

“I’m not necessarily convinced that it’s just Burberry- specific,” John Guy, a consumer-goods analyst at Berenberg Bank in London, said in a phone interview. Burberry has also been hurt by its decision to cut lower-priced products, he said.

Burberry dropped 287 pence to 1,088 pence, erasing about 1.27 billion pounds ($2.04 billion) in market value. LVMH Moet Hennessy Louis Vuitton SA (MC), the world’s biggest maker of luxury goods, fell 3.4 percent in Paris trading, Cie. Financiere Richemont SA (CFR) lost 5.1 percent in Zurich and PPR SA, owner of the Gucci brand, declined 2.1 percent.

Earnings Estimates

“We would not be surprised if other luxury players are seeing similar trends” to Burberry, Kate Calvert, an analyst at Seymour Pierce in London, wrote today in a note, cutting her recommendation on the stock to hold from buy.

Before today, analysts had estimated adjusted pretax profit for the year of 407 million pounds to 454 million pounds, according to Burberry. The average estimate of 14 analysts compiled by Bloomberg was about 429 million pounds.

In China, where a boom in demand for watches and jewelry has spurred sales gains for luxury-goods companies, revenue has slowed ahead of a once-a-decade leadership transition by the Communist Party later this year, Cartwright said. There has also been a slowdown in gift-giving, the executive said.

Slowing Growth

“The traveling consumer out of Asia, out of China in particular, may not be as prevalent as they were in terms of some of the entry-price products, the aspirational luxury products,” Cartwright said. “That’s potentially hitting Europe these last few weeks.”

Retail sales, excluding currency shifts, rose 6 percent in the period ended Sept. 8, compared with growth of 14 percent in the first quarter, Burberry said. Sales declined in the last couple of weeks, Cartwright said, calling the slowdown “broad- based in all of the regions.”

Still, some of the weakness in Burberry sales may be “self-inflicted,” said Berenberg’s Guy, citing Burberry’s attempts to move upscale by cutting some opening-price-point products, particularly in the U.S.

Cost Management

The U.K. company’s faltering growth contrasts with luxury- goods makers including Salvatore Ferragamo SpA. The Florence, Italy-based shoemaker’s August sales were “surprisingly positive” in the U.S. and Europe, underpinned by international customers, while growth in China is “still significant,” Chief Executive Officer Michele Norsa said last month.

Burberry’s U.S. sales were disproportionately impacted by a decision to remove some opening-price-point handbags and trenchcoats as the company seeks to increase its upscale positioning, Cartwright said. Spending has also been affected by upcoming elections.

“All of that is adding to the uncertainty,” Cartwright said. “There’s stuff coming from all directions.”

Burberry is better managing costs by clamping down on areas such as hiring and travel, Cartwright said. The company’s guidance for wholesale and licensing revenue remains unchanged, the CFO said.

To contact the reporter on this story: Sarah Shannon in London at sshannon4@bloomberg.net.

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net


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