Burberry turnaround on track after profit surprise

Burberry Group describes these full-year results as a meaningful inflection point, and with good reason.

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Burberry has had a chequered past of late and the shares remain down by 54% from the recent peak in April 2023. This followed a previous annus horribilis which included the change of chief executive, suspension of the dividend and a first-half loss which sent the shares into a tailspin.

However, the famous brand is regaining momentum, and for the last part of the year Burberry has reported a further increase in sales which represents the sixth consecutive quarter of improvement since the new CEO was installed.

For the year as a whole, revenues dipped by 2% to £2.42 billion, in line with estimates. However, at the profit level, there is a marked improvement given the strides which the group is making. Adjusted operating profit came in at £160 million, as compared to £26 million the previous year and higher than the expected £154 million. That meant a pre-tax profit of £49 million which swung from a loss of £66 million in the corresponding period.

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Group comparable store sales increased by 5% in the final quarter, and by 2% for the year. The growth was boosted by sales in both the Greater China and Americas regions, where the group revealed 10% growth in the fourth quarter and 4% overall. At 28% and 21% of overall revenues, these are meaningful contributions. The European region ended flat, with first-half growth offset by second-half declines as tourist activity reduced and the Middle East conflict took something of a toll.

The effects of the group’s transformation are also evident in some of the key metrics, with gross margin rising from 62.6% to 67.9%, adjusted operating margin ahead to 6.6% from a previous 1% and free cash flow of £141 million, as compared to £65 million the previous year.

Meanwhile, and partly as a result of the profit improvement as well as further cost savings, net debt reduced from £1.1 billion to £852 million. In the year to come, annualised cost savings of £100 million are expected to become entrenched, and this will enable capital expenditure of £120 million as the group continues to invest selectively on the higher margin lines.

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The progress is being achieved by measures on any number of 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. There is also a particular emphasis on the outerwear for which it has become traditionally known, which is currently outperforming expectations. The ongoing campaign to promote the line saw the benefit of extra success during the festive season, with both outerwear and scarves seeing double digit sales growth.

The outlook comments were optimistic but not cavalier. Burberry 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 inflationary impacts of the conflict, along with European tariffs announced by the US, have tended to weigh on the luxury fashion sector, which in turn has taken some of the shine from Burberry’s performance of late.

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The shares have nonetheless risen by 21% over the last year, as compared to a gain of 20% for the wider FTSE100, enabling the group to rejoin the premier index in September. In addition, the shares are ahead by 31% since the appointment of the new CEO.

However, there remains something of a mountain to climb, such that investors are ready to accept but are not yet fully convinced of a sustained recovery, as evidenced by a surprisingly downbeat reaction to the numbers. The market consensus of the shares as a hold, albeit a strong one, could therefore remain in place for the time being despite an update which shows that this recovery is well on track.