15th Jul 2022 20:23
(Alliance News) - Burberry Group PLC reported on Friday that continued Covid disruption in China had offset comparable store sales growth in its first quarter.
"Burberry's first quarter performance has sorely disappointed the market, with concerns around lacklustre growth rates. Mainland China is acting as a serious drag for the group, which is overshadowing successes elsewhere, including increased domestic spending in other markets, which is needed to offset lost tourism spending from Chinese visitors to Europe," commented Sophie Lund-Yates, equity analyst at Hargreaves Lansdown.
The London-based luxury fashion retailer reported retail revenue of GBP505 million in its first quarter ending July 2. This represents an increase of 5.4% from the GBP479 million achieved a year prior.
There was a 35% reduction in comparable store sales within China, however, due to restrictions and store closures to control Covid-19 outbreaks. Excluding mainland China, comparable store sales were up 16%.
China remains wedded to a zero-Covid policy, crushing new outbreaks with snap lockdowns and forced quarantines despite mounting public fatigue and damage to the economy.
China's biggest city and business hub, Shanghai, reopened in June after being sealed off for two months. However, other area still face some restrictions.
Richard Hunter, head of markets at interactive investor, said: "The group must now hope that pent-up demand is now building again in China, and the early signs are tentatively encouraging. Even so, until such time as that economy can resume firing on all cylinders, the clouds will inevitably linger."
AJ Bell's Danni Hewson was less optimistic: "While the country's latest GDP figures included news that retail sales had picked up in June, there is a feeling that boost may only reflect pent-up demand from people who couldn't get out during lockdowns, meaning the month's sales recovery might be unsustainable."
China's economy grew just 0.4% in the second quarter of 2022, a two-year low, official data showed Friday. Retail sales picked up 3.1%, after plummeting 6.7% in May.
Although there are signs that China's economy has started to recover since Shanghai eased lockdown restrictions in June, analysts expect that pressure on consumption will likely persist.
"The group's medium-term ambitions for revenue growth are admirable, but exactly how this will be achieved is the big question for newly minted CEO - ex-Gianni Versace leader Jonathan Akeroyd. The heavy lifting for Burberry's strategic pivot is largely over, and the question now turns to one of delivery. The group's done very well to forge all these new commercial tools – now it's time to use them." HL's Lund-Yates said.
Looking forward, Burberry expects a currency tailwind of GBP190 million to revenue and GBP90 million to adjusted operating profit for the current financial year.
In financial 2022, the firm generated revenue of GBP2.83 billion and adjusted operating profit of GBP523 million.
ii's Hunter added: "In theory, luxury goods retailers should be bombproof from inflationary and even recessionary environments, with the profile of the consumer at the top end being insulated from the economic constraints of many others. However, the closure of shop windows in key regions and the lack of a full return of the Asian tourist still remain headwinds."
"Although the company is well-regarded and its longer term aspirations are understood, for the moment the market consensus of the shares as a hold is representative of the fact that investors are not quite yet ready to join the party," Hunter continued.
Burberry closed 3.3% lower on Friday at 1,594.50 pence, the second worst performer in the FTSE 100.
By Heather Rydings; [email protected]
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