Another profit beat keeps Burberry turnaround on track

The “Burberry Forward” strategy is gaining momentum as the brand increasingly resonates with the Gen Z cohort, keeping Burberry Group (LSE:BRBY) relevant to a younger generation.

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The CEO is now over two years into his tenure and has injected a breath of fresh air into the brand’s fortunes. The group previously described the full-year results in May as a meaningful inflection point, and with good reason. It is no coincidence that the share price has risen by 21% over the last two years, but equally promisingly Burberry is fully aware of the difficult economic backdrop and that in any event its transformation is far from complete.

The interim results show continued progress on several fronts. Revenue rose by 6% in the 26 weeks ended 26 September to £1.1 billion, and adjusted operating profit came in at £62 million, ahead of expectations and compared to a loss of £19 million in the corresponding period last year. This translates to a pre-tax profit of £19 million versus a previous £48 million loss and underneath the bonnet it is becoming increasingly clear that the strategy is gaining traction.

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Outerwear sales grew in the double-digit range, boosted by rainwear, while more broadly womenswear was another performer. The e-commerce contribution saw growth in sales in the mid-teens percentage range, adding to the appeal of physical stores across a number of geographies.

Retail sales overall grew by 4% in the half-year and were ahead of market estimates, driven largely by particular strength in the Americas and Greater China, which added 12% and 7% respectively. Asia Pacific growth of 3% was achieved, despite a 1% drop in Japan in the latest quarter which suffered from the continued decline of tourists from China, but offset by 12% growth in South Korea due to increased domestic and tourist spend.

One fly in the ointment came from the Europe, Middle East, India and Africa (EMEIA) region, where sales declined by 2% given the ongoing fallout from the Middle East conflict and lower tourist spend.

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Progress is being achieved by measures on many fronts, including the attraction of Gen Z customers despite intense competition, which not only is a vindication of the new “Burberry Forward” strategy but is also a promising sign of the brand remaining relevant to a younger generation. Indeed, for the first quarter there was a double-digit increase in Gen Z sales, with a strong contribution from Greater China. There is also a particular emphasis on the outerwear for which it has become traditionally known, which is currently outperforming expectations.

The inflationary impacts of the Middle East conflict, along with European tariffs announced by the US have tended to weigh on the luxury fashion sector which has fallen somewhat out of favour, in turn taking some of the shine from Burberry’s performance of late.

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For its part, Burberry is banking on a splash in the upcoming peak selling season, resulting in free cash flow turning negative to the tune of £147 million overall, impacted by £197 million of working capital used to bolster inventories. Even so, the group is close to achieving £100 million of annualised cost savings and the continued absence of a dividend remains prudent at this stage.

Burberry’s general outlook comments remain optimistic but not cavalier. The group fully recognises that the transformation is still in its early stages, and that of course the fashion industry can be a fickle business. At the same time, a brand which had moved away from its traditional British traits of heritage and innovation, which had such appeal to overseas buyers and particularly tourists with an aspirational and stylish look, still needs to be fully re-established. The group remains mindful of an uncertain environment but nonetheless expects revenue growth and margin expansion for the year as a whole.

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Burberry has delivered a chequered performance over recent years but is making strides towards its former glories. Despite the more recent boost since the installation of the new CEO over two years ago, the shares remain down by 35% over the last three years which is proof if it were needed that there is more to be done.

Over the last year, the clouds overhanging the luxury sector have been a weight on Burberry, with the shares having declined by 9% as compared to a gain of 9% for the wider FTSE100. Progress is nonetheless in evidence over several consecutive quarters, and the strong opening reaction to the update reflects that some buyers are being tempted into the improving trend. It could also put upward pressure on a market consensus which is currently stuck at a hold, albeit a strong one.