18th May 2016 09:55
LONDON (Alliance News) - Burberry Group PLC on Wednesday announced a three-year investment and cost-saving strategy, after profit fell in its recently ended financial year and it warned of ongoing challenges in its high-margin Chinese business.
Shares in Burberry were trading down 3.2% at 1,106.00 pence on Wednesday morning, among the worst performers in the FTSE 100.
The luxury goods retailer had warned throughout the course of the year that unfavourable foreign exchange rates and a challenging economic environment for its high-margin Chinese business were harming its results.
During the year, Burberry's retail sales, which make up 73% of revenue, fluctuated quite dramatically. In the first quarter, retail sales were up 6%, before declining by 4% in the second quarter, remaining flat in the third quarter and then falling again by 5% in the fourth quarter, below some analyst forecasts.
Burberry said during the year that sales were being hit due to lower demand from luxury customers, particularly in China as a result of weakening customer sentiment, and declining footfall in Hong Kong and Macau as fewer customers from mainland China travelled over to shop.
This also came during a slowdown in economic growth in China and a clampdown on gift-gifting in the country as part of anti-corruption measures.
On Wednesday, Burberry reiterated that Hong Kong had suffered from "significantly" lower footfall, but that mainland China did improve in the second half of the year. Excluding Hong Kong and Macau, sales in the Asia Pacific region would have delivered low to mid single-digit growth.
According to Liberum, 40% of Burberry's sales come from Chinese customers globally, versus 30% for the wider luxury goods sector, meaning the slowdown for the world's second largest economy affects a large portion of its revenue.
Burberry said its pretax profit in the year ended March 31 fell to GBP415.6 million from GBP444.6 million the year before, as revenue slipped to GBP2.51 billion from GBP2.52 billion. Liberum said these results were in line with consensus.
Retail and wholesale profit, however, was below guidance, falling to GBP380.9 million from GBP399.2 million.
At the start of the financial year, Burberry said it expected retail and wholesale profit for the full year to be GBP50 million higher than the prior year. Then in May, it lowered its guidance by GBP40 million saying that it only expected it to rise GBP10 million if exchange rates remained the same.
In July, it then increased the GBP10 million estimate to GBP20 million, before in November saying that at the latest exchange rates, it expected retail and wholesale profit to be flat.
Retail/wholesale revenue, however, did rise by 1% to GBP2.47 billion from GBP2.46 billion, as 2% growth in retail alone offset a 2% decline in wholesale alone.
Licensing profit, meanwhile, dropped to GBP36.9 million from GBP56.0 million, as revenue fell to GBP42.4 million from GBP67.7 million, which Burberry said reflected the expiry of its Japanese licences.
Burberry said it will invest about GBP10 million in financial 2017 and then a further GBP20 million to GBP25 million per year over the following two years in order to improve the quality of the business and ultimately boost revenue.
"Looking forward, we believe that our initiatives will enable Burberry to again outperform sector growth in the GBP200 billion global luxury market, creating further shareholder value," Burberry said in a statement.
It also intends to deliver at least GBP100 million of annualised cost savings by financial 2019, GBP20 million of which will be delivered in financial 2017, by "reducing complexity, simplifying processes and eliminating duplication". The associated one-off costs are expected to total around GBP60 million across the first two years.
If it meets its growth targets, Burberry will also pay an additional GBP20 million of performance-related pay on top of the existing GBP20 million for financial 2017.
Burberry will pay a final dividend of 37p, which is up 5% year-on-year. It also will launch a share buyback programme of up to GBP150 million in financial 2017, its current financial year. Liberum said it believes the share buyback is at the lower end of what the market expected and may receive a "lukewarm response" from investors.
Looking forward to trading in the current year, Burberry said it expects net new space to contribute low single-digit percentage growth to retail revenue in the full year, while wholesale revenue will decline by 10% in the first half at constant exchange rates due to significantly tighter inventory control by US wholesale customers and "continued cautious ordering" in other regions.
Licensing revenue is expected to fall by about GBP20 million at constant exchange rates in the full year, again reflecting the expiry of Japanese licences.
Adjusted retail/wholesale profit should benefit by about GBP50 million in the full year, if exchange rates remain at current levels, Burberry added, which is down GBP10 million from the GBP60 million it predicted in April.
Also in April, Burberry lowered its adjusted pretax profit guidance for financial 2017 to GBP405 million, from its previously guided range of GBP405 million to GBP465 million. On Wednesday, it said it still expects adjusted pretax profit to be towards the bottom end of that range.
"While we expect the challenging environment for the luxury sector to continue in the near term, we are firmly committed to making the changes needed to drive Burberry's future outperformance, underpinned by strong brand and business fundamentals," Chief Executive Christopher Bailey said in a statement.
"We continue to see significant opportunities ahead of us and have put ambitious plans in place to increase future revenue, enhance productivity and create a more efficient organisation," he added.
By Karolina Kaminska; [email protected] @KarolinaAllNews
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