Interactive Investor

Burberry remains in style despite the pandemic

20th January 2021 10:38

Richard Hunter from interactive investor

Lockdown and Brexit put strain on the luxury goods brand, but its innovation has paid off.

Burberry (LSE:BRBY) remains stifled yet defiant in the face of the pandemic.

Being at the luxury end of the market is a blessing and a curse in the current environment.

On the one hand, Burberry’s wealthy customers should in theory be less affected by economic turmoil. The strength of full-price sales in the company’s latest results, for the third quarter of 2020, provides some evidence for this.

However, shopping for its products is seen by many as a physical experience, and so the widespread closure of stores and a tourist market which has all but disappeared for the moment is a bitter pill to swallow.

As such, Burberry has had to join the crowd in concentrating on demand via its online channel. Its innovative “brand heat” campaigns, one which caught the zeitgeist in partnering with footballer Marcus Rashford, have maintained the brand’s relevance.

In addition, the further evident growth in younger customers is of course a promising sign for the future. Digital full-price sales growth of 50%, while not sufficient to arrest an overall decline, is nonetheless proof of a successful strategic shift.

Indeed, Burberry’s ability to maintain pricing has seen an overall growth in full-price sales, with leather and outerwear being particularly popular at present.

By geography, mainland China saw extremely strong growth within a notable performance throughout the Asian region. In the background the concentration on efficiency remains on track, with particular attention paid to inventory and cost management.

The temporary evaporation of tourism has had a particular effect in the likes of Europe, as evidenced by a decline of 37% in comparable store sales. In terms of the supply chain, the company anticipates a modest increase in border compliance costs following Brexit.

Rather more worrying is the longer-term implications of the VAT arrangement. Previously, non-EU tourists were eligible for VAT refunds on products, but with this no longer in place the allure of the UK as a luxury goods destination will be lessened.

This additional headache is one which the company cannot fully prepare for until travel restrictions are lifted and the picture becomes clearer.

As with so many companies where the pandemic has had a material effect, Burberry is looking to manage those factors within its control.

Its innovative brand strategy coupled with its high-end offering are appealing to both a new, younger generation as well as the existing devotees. By the same token, there are any number of issues to navigate in the current environment.

The share price has had a determined run of late and has recovered by 60% since the low in March. Over the last year, however, the shares remain down by 24%, as compared to a drop of 12% for the wider FTSE 100.

The strength of the brand is not in question. But the immediate challenges are a drag on the market consensus, where the jury remains out for the time being, with the general view of the shares as a ‘hold’ still in force.

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