14th Jul 2023 10:52
(Alliance News) - Burberry Group PLC's performance in China pleased investors on Friday, but others were left asking if the luxury fashion house has the "necessary cachet" after it saw lower sales in the Americas.
"Burberry has reported a 19% jump in retail revenue for its first quarter, as the luxury giant proves it's still very much flavour of the month overall. Underneath the hood, things aren't quite as rosy as they might appear though," said Hargreaves Lansdown analyst Sophie Lund-Yates.
In the 13 weeks that ended July 1, London-based Burberry said overall comparable store sales rose 18% from a year earlier, including a positive performance across several global divisions.
Comparable store sales for the group excluding Mainland China was up 11%. Within that, Europe, Middle East, India and Africa sales were up 17%, South Asia Pacific up 39%, Japan up 44% and South Korea up 6%. The Americas division was an outlier, falling 8%.
Burberry also reported a "strong recovery" in Mainland China, where comparable store sales rose 46%.
interactive investor's Richard Hunter noted "the economic reopening in China and the established return of the tourist providing a twin boost".
Meanwhile, AJ Bell's Danni Hewson said: "Expectations for a big bounce coming out of lockdown for the Chinese economy had clearly run ahead of themselves. In the West a wave of so-called 'revenge spending' followed the easing of restrictions but China's population had been less protected from the economic impact of Covid by their government and, as a result, any recovery was likely to be more steady than spectacular.
"This could be a good thing for Burberry if it also means a pick-up in economic activity is more sustainable," she explained.
However, Lund-Yates said that growth elsewhere masks the drop in the US, where a reduction in domestic spending was only partially offset by people spending abroad.
"One reason for this is likely to be the tougher economic conditions across the pond. The US is depleting its savings at a faster rate than other areas, reducing consumers' sense of resilience and therefore willingness to spend on non-essentials. While luxury names are usually able to stand up to economic pressure more than other names, Burberry may well find its position in the luxury hierarchy isn't quite as high as ultra-luxury names, leaving it slightly more vulnerable," Lund-Yates explained.
Looking into sales in the Americas, AJ Bell's Hewson questioned: "Does Burberry have the necessary cachet?"
She noted that the firm is likely to face "a big test of its luxury credentials in the coming months".
"When economic times are tough, sales of true luxury goods are often relatively unaffected as the wealthy clientele who buy them are insulated from the worst of the impact," Hewson explained.
Overall, first-quarter group retail revenue was GBP589 million, up 17% from GBP505 million a year earlier, and up 19% at constant exchange rates.
Looking ahead, Burberry is maintaining its guidance for the year ahead. Based on this, Hunter believes it is "clearly choosing not to extrapolate the strength of sales from the first quarter."
Burberry maintained its current year guidance of high single-digit revenue compound annual growth rate from a financial 2020 base. This equates to a low double-digit growth in its current financial 2024 and around 20% of adjusted operating margin at financial 2020 constant exchange rates.
Burberry added it expects a currency headwind of around GBP150 million to revenue and around GBP70 million to adjusted operating profit, based on foreign exchange rates at June 29. It also maintains a medium-term revenue target of GBP4 billion in revenue.
"In all, this update represents a strong base for the year on which Burberry can build. The pace of growth, however, is one which investors will be keenly watching, particularly given any uncertainties arising in some of the group's key regions," ii's Hunter said.
He also noted the somewhat "turbulent" share price of the company. Shares in Burberry were up 0.1% to 2,108.00 pence each in London on Friday morning. Over the last 12 months the stock is up 28%, however in the year-to-date it has edged up just 2.0%.
Hunter added: "For the moment, the signs are encouraging but the clouds need to clear, with the market consensus of the shares as a hold reflecting some lingering uncertainty on prospects."
By Sophie Rose, Alliance News reporter
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