Burberry profit warning

Shares in Burberry go cold as its coats and scarves fail to bring in the Chinese buyers.

Shares at the fashion label Burberry fell more than 8% at the start of trading today as it warned that profits would be even lower than its reduced expectations for this year
The company blamed “an external environment that remains challenging for luxury,” for revenues that fell 5% in the final quarter of 2015 against an expected fall of 1.4%. Chief executive Christopher Bailey said, however, that the company is “making good progress with developing enhanced future productivity and efficiency plans.” Some analysts were doubtful that much could be improved, however, given that Burberry is already known for its effective and efficient online sales focus.

The cause of Burberry’s problems appears to be a change in the buying habits of wealthy Chinese, who have taken up Japan as their favoured shopping destination rather than Hong Kong. This is despite a fall in the value of the Japanese yen (JPY) against the Chinese yuan (CNY). Burberry has very few Japanese stores and outlets, and the country accounts for just 2% of Burberry’s sales against a more usual average among luxury brands of 10%.

Burberry does have around 65 stores and outlets in China (out of 400 worldwide), and these have also been effected by China’s stalling economy.

Burberry’s share value is currently at around 1,260 pence, a fall of 6% on the day and nearly 30% on the year. In March, Burberry was trading at 1,450, boosted by news that a takeover appeared to be imminent when an anonymous buyer built up a stake. That came to nothing and the previous gradual fall in share values continued, from a high of 1,900 in February 2015.

As an exporter from Britain, the more recent fall in sterling should help Burberry, says Alex Bennett, fashion business specialist at Smart Currency: “But any global brand such as Burberry, whether large or small, that makes sales in both the USA and Asia, is subject to currency risk and should be looking at protecting themselves with a currency exchange strategy, such as a forward contract.”

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