Luxury goods seller has struggled with the impact of Covid-19 on sales and stores. It is improving, but the outlook is unclear.
The outlook remains chequered for luxury lifestyle brand Burberry (LSE:BRBY) as the pandemic rumbles on, but the company has made some progress of late.
A vastly improved second quarter improved its overall half-year numbers, where store sales and revenues exceeded expectations, but this was not enough to repair the damage which had already been caused.
Store sales for the half declined by 25%, though this was better than the expected figure of 29%. The figure comprised a drop of 45% in the first quarter and an improvement to a decline of just 6% in the second.
Furthermore, the company has reported that the figure moved back to growth in October.
While this is a positive development, it does not incorporate the effects of the second wave lockdowns. The impact may not prove as severe as the full lockdowns did earlier in the year, but will nonetheless somewhat derail Burberry’s recovery.
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Revenues also came in better than expected, with a decline of 31% to £878 million beating estimates of £849 million, with the reported operating profit of £88 million comparing with an expected loss of £3 million.
Even so, the 62% drop in pre-tax profit underlined the irrecoverable impact of the first quarter performance.
There are several glimmers of hope, however, even against the tough economic backdrop.
Operating expenses fell 17%, cost savings were driven higher, and overall profits were boosted by a part reversal of the previously high impairment numbers, such as the value of inventory held.
The company’s financial position remains comfortable, with net cash of £542 million and an undrawn revolving credit facility of £300 million also helped by the savings from an unpaid dividend.
Meanwhile, Burberry has chosen to target opportunities arising from rebounding markets following the initial lockdown, with a resultant spike in comparable store sales of 21% in the Americas and 10% in Asia.
This has been complemented by a further focus on innovative digital shows, increasing brand heat and a boost to some of its accessory sales, especially leather. For the longer term, and currently being evidenced in mainland China, the arrival of the younger generation is promising for brand prospects.
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Of course, there are also some high hurdles to overcome. The second wave has already resulted in 10% of its stores being closed. In addition, there is no obvious immediate sign of a return to international travel and therefore Burberry’s important tourist market, where full price sales of just 4% for the period compare with a previous figure of 28%.
There are also political considerations, with potential civil unrest in Hong Kong and the uncertainty of the terms of the Brexit agreement casting shadows on the company’s supply chains.
The positive initial share price reaction to the numbers against a weaker market reflects some relief on Burberry’s performance and an acknowledgement that the company is running hard to stand still.
While the shares have rebounded 50% since the March low, they remain down by 26% in 2020 and over the last year have fallen 20%, underperforming the wider FTSE 100 which has dropped by 13%.
The remaining half of the year promises to be another challenging period, leaving the jury out on prospects. The market consensus of the shares as a ‘hold’ is therefore likely to remain in place for the time being.
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