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When British fashion house Burberry Group (BRBY) gives a first quarter trading update on Wednesday we will get a first look at the true effect of the pandemic on the luxury goods market.
Burberry, known by its trademark check pattern, is reliant on selling to customers who dress to impress. But with nowhere to go during the lockdown, sales are likely to have suffered. Local and national lockdowns all over the globe have not helped either.
The group saw a significant fall in pre-tax profits at the full year stage, with the lockdown already hitting revenues hard in its fourth quarter, largely because of its reliance on Chinese buyers; a market which was, of course, hit first by the coronavirus outbreak.
Full year pre-tax profits came in over 60% lower, falling from £441 million a year earlier to £169 million, with 60% of the FTSE 100 firm’s stores still closed at the end of its March reporting period. That has, of course, continued with Burberry, like other non-essential retailers, only finally free to open their outlets on 15 June in the UK. Sales in the quarter to March fell by 27%, slightly above the 30% drop the company expected, with revenues for the year down 3.4% to £2.6 billion.
Slashing its dividend by 73%, from 42.5p to 11.3p a share, it warned that its first quarter would be “severely impacted” by the ongoing pandemic. Just how badly impacted it has been will become evident on Wednesday.
The group has been quick to respond to changing consumer trends though and at the full-year stage its digital business was the brand’s fastest-growing channel, up 22% – a shift chief executive Marco Gobbetti described as “transformational”.
And, just as other retailers in the embattled retail sector have noted, changes that were already underway have simply been hastened by the pandemic. Mark Morris, senior vice president of digital commerce at the company has said: “What moved up the order very fast was [the change from] offline to online behaviour.” It has even introduced online shopping consultations during the lockdown.
Of course, there is no getting away from the fact that China is a core market for the luxury fashion brand and with local lockdowns and global travel bans for much of the first quarter of its year, both sales to Chinese within China and those that would usually have been made overseas have been impacted. Half of Burberry’s Chinese customers usually buy abroad.
A lot of Burberry’s ability to withstand the worst effects of the pandemic consumer slowdown depends on the spending patterns of Chinese consumers. Burberry relies on about 40% of its total sales coming from Chinese buyers.
And it is this reliance on Chinese buyers, which is higher than the sector average, that has been as much a cause for concern of late, as a reason to celebrate in the past. The luxury goods market, especially when it comes to Chinese buyers, has taken a battering in the past year or so.
Burberry has already taken a hit from pro-democracy protests in Hong Kong. The Hong Kong street protests prompted sales at Burberry to halve from 8% of the group total in the three months to the end of December last year.
Pre-pandemic estimates suggested that Chinese consumers would account for half of luxury purchases globally by 2025. But the pandemic is also now expected to hit luxury goods sales by as much as a third. How quickly the sector recovers will have a direct impact on how quickly Burberry recovers.
A turnaround has been a long time coming for Burberry. But if Chinese buyers make a rapid return to the spending patterns Burberry relies on then its recovery may only have been delayed, and not derailed, by the pandemic.
Brokers’ opinions on the stock are mixed. UBS recently reiterated its sell investment rating on Burberry Group and raised its price target from a very precise £10.01 to £10.15. JP Morgan Cazenove remains neutral but has raised its price target from £14.50 to £15.50p. While Bernstein has retained its market perform investment rating on Burberry but cut its price target from £15.10 to £14.10.
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