12th Nov 2014 11:11
LONDON (Alliance News) - British luxury fashion retailer Burberry Group PLC Wednesday reported a drop in its pretax profit in the first half, after taking a big hit from the strength of sterling, and it again warned of pressure to its margins for the full year due to weaker consumer confidence in Europe and slower Asian growth.
Burberry posted a pretax profit of GBP142 million for the six months to September 30, down from GBP159 million the prior year, after taking a GBP31 million hit from the strong pound, as well as charges related to bringing its fragrance and beauty operation in-house and a finance charge related to its Chinese business.
Excluding the charges, pretax profit fell 12% to GBP152.3 million due to the currency movement hit. It said the figure would have been up 6% at constant currencies as it cut costs and reported an increase in revenue to GBP1.10 billion, from GBP1.03 billion.
The retailer said it does not expect a "material impact" in the second half of the year to its profits from sterling strength, but it warned about pressure on margins as its markets get tougher.
"We expect some downward pressure on the full year retail/wholesale margin, reflecting the negative impact of exchange rates, a more difficult external environment and continued investment in key initiatives to drive long-term profitable growth," it said.
Burberry still raised its interim dividend by 10% to 9.7 pence per share, which it said reflects its intention to "move progressively to a 50% dividend payout ratio".
Sales continued to be driven by its iconic trench coats and large leather goods, with demand led by Chinese consumers shopping both in China and when travelling abroad.
However, last month Burberry warned its investors that trading in its key markets is getting tougher, after it said growth slowed in the second quarter as its key travelling Chinese consumers splurged out less, and it warned that weak consumer confidence in Europe and slower Asian growth would weigh on its second half.
The slowdown echoes comments from other luxury goods companies, who are facing increased worries about demand from China in the wake of the political issues in Hong Kong and as sanctions on Russia in the wake of the crisis in Ukraine hits demand from that country.
Burberry said Wednesday that revenue rose 14% at constant currencies in the six months to September 30, buoyed by 15% sales growth in retail revenue, and 13% growth in wholesale revenue. It said licensing revenue was down 3% at constant currencies. That marked a slowdown from the first quarter when it had reported sales growth of 17% at constant currencies.
On a reported basis, retail and wholesale sales were up only 8%, while licensing revenue was down 18%. It said sterling strength wiped around GBP75 million off its reported revenue for the first-half.
Burberry said demand in the first-half was driven by double-digit sales growth in Asia Pacific and the Americas, with travelling "luxury customers", particularly from Asia, driving that growth, buoyed by the relaunch of its heritage trench coat, leather bags and mens tailoring.
Within retail, it said that in the UK, domestic demand remained strong offset by weakness from travelling luxury customers, where it said demand seems to have shifted to other countries within Europe, Middle East, India and Africa.
In the Americas, it said it delivered double-digit comparable sales growth, having increased conversion online.
Wholesale revenue, which represents roughly 29% of Burberry's overall revenue and includes sales of apparel and accessories to department stores, franchise stores and travel retail, benefited from earlier deliveries and in-season orders in the first half, it said.
"Looking ahead, in a more difficult external environment, we continue to focus on the things that we can control. Through authentic products, great customer experiences and a culture of continuous improvement and innovation, we remain confident of Burberry's sustained outperformance," said Chief Executive Christopher Bailey in the company's statement.
During the first half, Burberry opened a net seven stores and concessions, including five openings in key European airports such as Barcelona, London and Milan, and four concessions in the Middle East as it tries to improve its store portfolio in the region.
Burberry said it still plans on spending around GBP200 million in capital expenditure in total this year, two-thirds of which it said will be going into retail projects. It plans on making 20 mainline store openings and about 20 closures during the year.
Burberry shares were trading at 1,510.00 pence mid-morning Wednesday, down 1.2%.
By Rowena Harris-Doughty; [email protected]; @rharrisdoughty
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