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Confirmed: post-Brexit weaker sterling suits Burberry well

By Angela Gonzalez-Rodriguez

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Business |ANALYSIS

A weaker post-Brexit pound has turned to be the best ally weary British retailers could hope for, as cheaper prices are bringing new waves of tourists, quite eager to splurge in the more affordable than ever British fashion.

The market expected Burberry to return to like-for-like sales growth – in the region of one percent - as analysts were confident the luxury fashion retailer has benefited from a better summer for luxury sale and left behind the struggles from the first quarter, when like-for-like sales fell three percent.

Burberry said Tuesday that it benefited from the pound’s weakness, reporting that revenue rose to 1.16 billion pounds in the six months ended September 30, from 1.1 billion pounds in the same period last year.

In Brief:

Revenue

1,159 million pound

Retail Turnover

Wholesale Sales

Retail turnover UK

  • Burberry expects weak pound to drive tourists’ shopping worldwide

Burberry: “pound’s weakness should add at least 125 million pounds to full-year adjusted profit”

Burberry said the pound’s weakness should add at least 125 million pounds to full-year adjusted profit based on October 12 exchange rates, reported Reuters. However, on an underlying basis, which excludes the impact of currency exchange rates, revenue fell 4 percent, a weak result that saw Burberry shares slide 7 percent.

Nivindya Sharma, Senior Analyst at Verdict Retail commenting the results reported by the luxury retailer highlighted that “The luxury brand’s story remains broadly the same, with wholesale and licensing continuing to drag down total revenue growth, reporting declines of 6% and 51% respectively; in part as Burberry re-evaluates its licensing partnerships and the presence of its brand in various wholesale markets, but also due to weak demand in key markets such as the Americas.”

Asian markets remained a safe haven for the company, which saw an unexpected 9 percent growth in retail sales as Burberry’s largest market in the region - Mainland China - recorded mid-single digit comparable sales growth in Q2 despite continuing store rationalisation in the region. “However, the Americas remain a particular bugbear for the luxury player, as the continuing struggle of department stores in the region and the resultant tighter inventory controls hurt Burberry’s wholesale revenue, while political uncertainty dampens domestic customer demand affecting Retail revenue,” warns Sharma.

However, the benefits of more favourable currency exchanges for exports didn’t reach Burbrry’s local market. “Unfortunately, the UK makes up a relatively small percentage of Burberry’s sales,” said George Salmon, an equity analyst at Hargreaves Lansdown. “So while the group has managed to deliver improving like-for-like growth in its stores this quarter, this was achieved against a pretty unchallenging comparative period. Conditions remain difficult.”

Similarly, XTB.com analyst Joshua Raymond recognized in a note to market that although Burberry’s reported 2 percent growth in first half underlying revenues and unchanged sales growth has been “a little disappointing”, “What is impressive is the UK outperformed in its second quarter and this comes amidst the Brexit vote. However this could also be related to the dramatic drop in the pound and wealthy visitors buying Burberry goods in the UK.”

As Raymond highlighted Tuesday, Burberry’s share price “has been extremely well supported since the start of July, rising more than 40 percent. Given the outlook and a stronger quarter on quarter performance, shareholders will be expected this momentum to continue.”

Sterling nosedive lifts fashion sales across the UK; from Burberry to ASOS

Burberry and ASOS have clearly profited from the sterling nosedive, as both companies –representing opposite edges of the local fashion spectrum – have reported improved figures for this period.

The tumbling pound is also providing a welcome boost for Burberry, which makes most of its sales overseas. Deutsche Bank expects the company to report like-for-like growth in retail sales for the first time in more than a year. “Growth may be held back by some recent price cuts, but … these have established a quite healthy global price architecture. Burberry profits should enjoy strong currency tailwinds in FY Mar-17, and we estimate these are now 120 million pounds at spot rates (vs 90 million pounds guidance),” the broker said.

Despite the unexpected heatwave in September, which took its toll on British clothing retailers, Burberry has benefited from the fall in the pound as tourists flock to its shops in the UK. But, has highlight experts quoted by ‘This is Money’, the main gain has been because it makes most of its sales overseas – with the value pushed up when the takings are converted back into sterling.

The first half of the year has been, if anything, eventful for the quintessentially British label, which saw its Creative Director and CEO, Christopher Bailey, announced to be sidelined as chief executive and replaced by Marco Gobbetti, currently at Celine. Gobbetti joins next summer, allowing Bailey move to the role of president and retain his title of chief creative officer. The move is thought to help the group stop falling profits and slowing sales.

In May, the group said it would slash 100 million pounds in costs to help offset difficult trading after reporting a 10 per cent fall in full-year profits, recalls the ‘Guardian’. However, analysts believe Burberry is on the right tracks with its turnaround and has been widely praised for its recent move to launch a "see now, buy now" fashion show.

In this vein, analysts at RBC Capital Markets said: "Burberry is at the forefront of the sector when adapting to changes in the millennial luxury consumer, who display greater appetite for newness and require faster response from luxury brands. Combining men/women runway events with ‘seasonless’ collections available to buy immediately after the shows is Burberry's attempt to close the gap between runway and retail in a new digital era."

Imagen:Burberry

Burberry