Burberry faces a lengthy stay in the bargain bin
The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Updates to add graphic.
By Aimee Donnellan
LONDON, July 15 (Reuters Breakingviews) -Retailers typically get rid of excess stock by throwing it in the bargain bin. After issuing another profit warning, suspending its dividend and replacing its CEO, that may also be 2.7 billion pound ($3.4 billion) Burberry’s BRBY.L fate for the foreseeable future. New boss Joshua Schulman’s plan to stop the rot at the UK retailer organically looks insufficiently innovative, and shareholders can’t even count on a buyout by a deep-pocketed luxury titan.
Schulman’s predecessor Jonathan Akeroyd only lasted two years as Burberry CEO. His plan was to bring “Britishness” back to the brand and reach a long-term 5 billion pound annual revenue target — against 3 billion pounds in 2023 — by selling expensive handbags, shoes and accessories. But amid a wider luxury sector downturn the company’s results for the 13 weeks to the end of June show the strategy hasn’t worked. Underlying sales fell 21% year-on-year. At the current rate Burberry is expected to book an operating loss for the first half of the year and miss its annual operating profit forecast.
Schulman, a former chief executive of Coach, plans to reinvigorate Burberry’s core offering of heritage trench coats and focus more on iconic plaid scarves. But Akeroyd’s predecessors already tried that. Their failure was the reason he was brought into lead a strategy involving pricey handbags in the first place.
On the face of it, shares that have now almost halved since January should whet the appetite of deep pocketed buyers like $390 billion LVMH LVMH.PA. But they are after higher-end luxury than Burberry offers, and in any case it's difficult to make the numbers stack up. Assuming the Christian Dior DIOR.PA owner offers a 30% premium, Burberry would be worth 4.6 billion pounds including over 1 billion pounds of net debt. If Schulman mustered the 525 million pounds of operating profit analysts polled by LSEG had pencilled in for 2028 — and Burberry’s tax rate stayed at its current 29% — the French luxury giant would only manage to eke out an 8% return. That’s way off, quite a bit below Burberry’s estimated cost of capital of 10%, and doesn’t reflect that analysts are likely to slash their forecasts anyway.
Private equity buyers are unlikely to ride to the rescue: Permira’s struggles to list Golden Goose will make buyout groups wary. Without a buyer or a strategy that will definitely boost sales, Burberry may need to target a less luxury audience — and book itself in for a lengthy stay in the bargain bin.
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CONTEXT NEWS
British luxury group Burberry on July 15 named former Michael Kors boss Joshua Schulman as its new chief executive, axing Jonathan Akeroyd after two years as it warned on profit and scrapped its dividend.
For the 13 weeks to June 29, underlying sales slumped 21% year-on-year. Burberry warned that on current trends it would miss forecasts for annual operating profit, and it would scrap this year’s dividend to invest in growth.
Burberry said on July 15 it would switch its offer back to be “more familiar” to its “core customers”, with a marketing campaign for outerwear to launch in October. Its last collection departed from its classic camel, red and black check print, in favour of bold colours.
The company said it expected to see an improvement in its second half and would also find cost savings.
Burberry shares were down 16.7% to 7.38 pounds by 1001 GMT on July 15.
Burberry has underperformed rivals markedly this year https://reut.rs/3Y4jsR4
Editing by George Hay, Oliver Taslic and Streisand Neto
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