Interactive Investor

Burberry shares punished for another China crisis in Q1

15th July 2022 08:05

Richard Hunter from interactive investor

Burberry has a grip on most things within its control, but it is almost powerless when it comes to macro events and Covid lockdowns. Our head of markets explains the latest share price decline.

Burberry Group's (LSE:BRBY)trading progress has been hampered in the first quarter by another China crisis resulting from the country’s zero tolerance policy on Covid-19.

The lack of Asian tourists coming to Europe in particular has been a bugbear for some considerable time, and the latest lockdowns in the region have inevitably had an impact. Asia Pacific sales overall declined by 16%, with sales in Mainland China dropping by 35% following store closures and lockdowns which also affected Burberry’s digital hub.

The group must now hope that pent-up demand is now building again in China, and the early signs are tentatively encouraging. Even so, until such time as that economy can resume firing on all cylinders, the clouds will inevitably linger.

In the meantime, and especially outside of Mainland China, there is rather more to celebrate. Overall store sales still managed to nudge up by 1%, against expectations of a 2% decline and, excluding the China figures, sales jumped by 16%. This was largely driven by a strong performance in the Europe, Middle East, India and Africa region where sales were up by an extremely strong 47%, with local sales exceeding pre-pandemic levels and with the return of the American tourist providing a further boost.

Retail revenues overall increased by 5%, and Burberry remains committed to energising further “brand heat”, remaining relevant, appealing and unashamedly high-end in its approach to both existing customers as well as a groundswell of growing younger followers.

New seasonal collections driven by a mixture of digital noise, pop-ups and pop-ins has generated some further excitement, with the new Lola handbag range contributing to strong growth for leather sales, up 21% outside Mainland China, with outerwear also putting in a strong performance.

The benefits of a weaker pound when a company has a raft of overseas earnings has also made a contribution, with an expected currency tailwind of £190 million on revenues and £90 million on adjusted operating profit expected to flow through to the full-year numbers.

Meanwhile, the £400 million share buyback programme has now commenced, which should provide some support to the share price, and the recently resumed dividend yield of 2.9% is reflective of the group’s own confidence for prospects.

In theory, luxury goods retailers should be bombproof from inflationary and even recessionary environments, with the profile of the consumer at the top end being insulated from the economic constraints of many others. However, the closure of shop windows in key regions and the lack of a full return of the Asian tourist still remain headwinds.

Burberry continues to move the dial on the elements within its control, but its next obvious tailwind would be the return of normal trading globally.

The share price has inevitably suffered the consequences of the recent developments in Asia and has fallen by 20% over the last year, as compared to a marginal gain of 0.4% for the wider FTSE100.

Although the company is well-regarded and its longer term aspirations are understood, for the moment the market consensus of the shares as a "hold" is representative of the fact that investors are not quite yet ready to join the party.

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