Pressure on Burberry to maintain this positive momentum

These half-year numbers from Burberry Group (LSE:BRBY) are flattered by comparisons to the group’s previous “annus horribilis”, but nonetheless a promising new trend could be emerging as a result of the new “Burberry Forward” strategy.

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While comparable store sales were flat compared to the corresponding period, the number moved to a positive 2% in the second quarter, which represents the fourth consecutive quarter of improvement since the new CEO was installed. It was also the first quarter of growth in two years, ahead of the expected 1%, and vastly improved on the negative 20% of the previous year, all of which will provide some comfort to investors.

By the same token, the pressure will now be on Burberry to maintain the momentum and to demonstrate that the second-quarter performance was not a flash in the pan. This will not be straightforward, given the uncertain macro environment, let alone the wider tariff implications particularly in two of its most important regions, namely the US and China. In addition, the group previously advised that although it estimates cost savings of £80 million this year, it is also prioritising investment which will result in capital expenditure of £130 million, while the then level of exchange rates could yet add a hefty £85 million hit to revenues.

By geography, the performance was a mixed bag, but the main level of promise comes from the improving second quarter trend across the board. In Europe for example, the group’s largest area which accounts for 37% of revenues, sales grew by 1% in both quarters despite the headwind that its UK business continues to be seriously impacted by the withdrawal of VAT refunds for overseas visitors, which has led to the UK being the least competitive destination in Europe for tourist shopping.

The Greater China (24% of group revenues) and Asian Pacific (15%) regions remain areas of particular concern, with sales declines of 1% and 2% respectively, although mitigated by growth in the second quarter of 3% in China and a flat performance in Asia. Indeed, consumer sentiment was on shaky ground even before the reciprocal tariffs which could yet damage the US and Chinese economies, and the situation will remain under close scrutiny.

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In contrast, there was a positive outturn from the Americas, where sales growth of 3% was attributed to new customers. There may be a caveat here, however, since it is unclear how much of this additional spending is the result of consumer purchases being pulled forward in anticipation of wider tariff impacts, and at 21% of overall revenues the region remains a core player.

Combined, the trend contributed to revenues of £1.03 billion in the 26 weeks ended 27 September, a decline of 3% but in line with expectations. Adjusted operating profit rose to £19 million from a previous loss of £41 million and was ahead of the estimated £12 million. A restructuring charge took the reported figures to an operating loss of £18 million, although this was also a marked improvement from the previous year’s £53 million.

The outlook comments are 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, needs to be reestablished.

There is also a particular emphasis on the outerwear for which it has become traditionally known, which is currently outperforming expectations. Amid the “golden quarter” the festive season is imminent and the new found momentum could see a further spike in sales as a result.

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A share price increase over the last year of 71% compares to a gain of 23% for the wider FTSE100. Indeed, the shares have risen by 57% in the last six months alone, which led to Burberry regaining its place at the top table in September, being re-promoted to the FTSE100.

However, the price remains 52% lower than the record high recorded in April 2023, reflecting that the focus on the group’s recovery remains of paramount importance. As such, the market consensus may remain in place until a clear new trend can be demonstrated, and as such is likely to stay at a hold, albeit a strong one.