Luxury Is the Future Says Burberry as It Preps for Mega China Rebound
LONDON — The only way is luxury, said Burberry as it reported record revenue and higher-than-expected profits in fiscal 2021-22 despite the lockdowns in China, war in Ukraine and rocketing inflation in the U.K., its home market.
Although Burberry’s new chief executive officer Jonathan Akeroyd didn’t reveal much about his strategy, it’s clear the future will be about gaining traction in the luxury market, focusing on the full-price business and wooing younger customers with fresh ideas and further strides in the environmental and social space.
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Akeroyd, who assumed the helm eight weeks ago, won’t be laying out his plan publicly until the November interim results, but on Wednesday, during the year-end presentation to analysts, he took center stage, along with Julie Brown, Burberry’s chief operating and chief financial officer.
It was the first time in two years that the company staged a live presentation at its London headquarters, and Akeroyd and Brown were in a bullish mood, optimistic about the future and the prospect that China will rebound mightily once local lockdowns lift.
Revenue in the 53 weeks ended April 2 rose 21 percent to 2.83 billion pounds.
Same-store sales grew 18 percent in the year, while full-price same-store sales were up 24 percent compared with the prior year, the result of the company’s push to eliminate discounting, bolster margins and behave more like a luxury brand.
Adjusted operating profit was ahead of guidance, rising 32 percent to 523 million pounds. Reported operating profit edged up 4.2 percent to 543 million pounds. Profit after tax rose 5.6 percent to 397 million pounds.
The company unveiled a 400 million-pound share buyback to be completed within the current fiscal year, and a final dividend per share of 0.354 pounds for the 2021-22 year.
Akeroyd said “true luxury” was the direction of travel for Burberry; it creates desire for customers and value for the brand. He said he wants to build on the “already strong platform” inherited from his predecessor Marco Gobbetti and from Burberry’s talented teams.
He said brand activations like Burberry’s Rodeo Drive experience; collaborations such as the recent sell-out one with Supreme, and “retail excellence” would help to burnish Burberry’s image and keep tills humming.
Akeroyd added that he has confidence in Riccardo Tisci, the chief creative officer, and described the designer as “consistent” in his vision for the brand, with a “strong eye and pulse for what the market needs.”
Akeroyd added that the two “feel comfortable with each other and we have a good dialogue going, too. He’s equally as proud as I am to be working for the brand.”
The new CEO said he is “very aware” that Burberry has transitioned into the luxury space and now “the expectation is growth. It was a very brave and impressive decision to exit markdown and now there’s an opportunity to play on newness.”
He added that in the Americas region there is “a much stronger appetite for the brand,” and great potential.
Burberry described the Americas as “the standout region” in fiscal 2021-22, with full-price sales almost doubling compared with two years ago, driven by new and younger consumers to the brand. Comparable-store sales in the region grew by 28 percent year-over-year.
The consumer is embracing the new, more luxe Burberry: Brown noted there was zero pushback from customers following two recent price hikes, in May 2021 and in January 2022. Burberry’s overarching strategy has been to nudge handbag prices from the 600- to 1,000-pound price range to the 1,000- to 2,000-pound one.
“We made the transfer successfully. There was no adverse response to the prices and we are seeing robust demand for products,” Brown said.
In fiscal 2021-22, full-price sales of outerwear and leather goods grew 39 percent and 28 percent, respectively, compared with two years ago when the company was still discounting.
Brown said the newly refurbished stores have been an ace marketing tool for leather accessories, in particular.
She said Burberry was originally targeting a 25 percent return on the new-format stores, and the majority of the units are already ahead of expectations due largely to sales of leather goods and outerwear.
Burberry now has 47 stores showcasing the new concept, including its Paris flagship on Rue Saint-Honoré. The company has a further 65 stores planned for refurbishment in the current fiscal year, with capital expenditure to range between 170 million pounds and 180 million pounds.
A year from now, around a quarter of Burberry’s directly operated stores will carry the new design.
Akeroyd said the Lola bag, which has a tactile, quilted finish, a TB monogram clasp and comes in a variety of shapes and sizes, has been performing “beyond expectations” in Burberry’s stores, and the brand will continue to roll out pop-ups for the Lola and other styles throughout the summer and the rest of the year.
The new CEO added that, on his watch Burberry would also go “the extra mile” for the environment. To wit, the brand said it would no longer be using exotic skins in future collections.
Asked about the decision, Akeroyd said the company made very few products with exotic skins, but it was important “to put down a marker” and make a statement about not using the material. Burberry stopped using fur in 2019.
Burberry said it would continue to keep select discount outlets open so that it can liquidate inventory in an ethical — and profitable — way.
The company said it has “substantially met” all targets it set as part of its 2017 to 2022 responsibility strategy. It is now carbon neutral across its own operations globally; all the electricity it uses is from renewable sources, and almost all of its products have “a positive attribute, meaning they carry a social or environmental benefit.”
The brand’s goal is to become climate positive by 2040 by further reducing emissions across its extended supply chain. Last fall, it set out a new biodiversity strategy, focused on protecting and restoring nature, expanding support for farming communities and developing regenerative supply chains.
There are still many question marks around China, but despite the uncertainty — and the drop in sales once lockdowns hit — Burberry is upbeat about its future.
Same-store sales grew 7 percent in the fourth quarter, compared with 5 percent in the previous quarter, with lockdowns weighing on performance in March.
Business in China fell 13 percent in the fourth quarter, although the decline was offset by 20 percent growth in other regions. Demand in the fourth quarter was particularly robust in the U.S., while business also picked up in Europe and the EMEIA region, Burberry said.
Overall, Asia Pacific comparable-store sales grew by 13 percent in the year, while mainland China comparable-store sales were up 37 percent.
The company added that its outlook for the current year is dependent on the impact of COVID-19 and the rate of recovery in consumer spending in mainland China.
Before the pandemic, around 40 percent of Burberry’s sales were from China, or Chinese tourists buying abroad. The region and its tourists now represent around one-third of Burberry’s business.
Brown said 40 percent of Burberry’s Chinese retail network, including e-commerce, is inactive due to local lockdowns, while trading in Hong Kong is “very challenging” because there are few Chinese tourists in the region.
Burberry said it plans to invest further in China and position the brand for a strong sales rebound when the lockdowns lift.
“We’re anticipating a rebound, and we’re prepared for it. We have bought inventory: we are investing ahead of the curve,” said Brown, adding that past experience has taught Burberry that when China recovers, it does so in a major way.
Akeroyd said there is still a “big appetite” for luxury goods in China. The full-price business in China was up 54 percent in the full fiscal year compared with two years ago.
Akeroyd said he hopes to resume opening pop-ups in China in the second half and he’s confident about the brand’s “retail and product mix” in the region. He added that Burberry’s new store is located in “the best location” in Shanghai.
Looking ahead, Burberry has maintained its guidance of high-single-digit revenue growth and “meaningful margin accretion” at constant exchange rates in the medium term.
The company said it is “actively managing” the headwinds from inflation which, at 9 percent in the month of April, is the highest the U.K. has seen in 40 years.
The company said for fiscal 2022-23, it is expecting a currency tailwind of 159 million pounds on revenue and 92 million pounds on adjusted operating profit.
Burberry also addressed queries about the war in Ukraine and confirmed that its three Russian stores remain shut, although it’s still paying its teams in the region. Brown said Russia represented less than 1 percent of sales.
Brown said she was encouraged by the performance in the EMEIA region. It wasn’t exactly stellar, but it’s getting better.
For the full fiscal year, comparable-store sales fell by 18 percent, which Burberry described as a “resilient performance given the ongoing drag from lack of tourists, who accounted for around 50 percent of annual pre-pandemic revenues in the region.”
The U.K. remained “challenged,” with London performance weak, given the high tourist exposure, while the Middle East continues to grow, driven by strong local demand and improved tourist flows.
Burberry’s share price closed generally flat at 15.84 pounds on Wednesday, and analysts were broadly positive about the yearly, and quarterly, performance.
The results were in line with analysts’ expectations.
Bernstein noted that Burberry is more exposed to China “and should therefore have a more material rebound potential if the country’s zero COVID-19 policy is amended, or phased out, before the second half of the year.”
Barclays noted that Burberry, “alongside the rest of the sector, is unlikely to recover some momentum until we get more visibility around the Chinese lockdown and around concerns over recession and macro sentiment.”
RBC Capital Markets said it awaits “further clarity on the strategic direction of Burberry, and evidence that it can close the growth gap with luxury peers.”
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