Burberry has blamed a sharp slowdown in sales on a tough market for luxury goods, in particular weaker demand from Chinese customers.
Shares in the FTSE 100 company, known for its British-made trench coats and cashmere scarves, tumbled 12.6% on the news, to £12.36. This is a three-year low, and wiped £800m from Burberry’s stock market value. Shares across the luxury sector were hit, including Prada, Hermes, Kering and Salvatore Ferragamo.
Burberry joins LVMH, which earlier this week became the first major luxury goods company to warn that the stock market collapse in China over the summer had affected sales, particularly at its flagship Louis Vuitton brand.
China’s economic slowdown has sparked fears over the global economy. The country’s stock markets have seen repeated bouts of panic selling this summer, with “Black Monday” sending world markets into a spin. This prompted Beijing to take unprecedented measures to stop the rout, including the biggest devaluation of the renminbi in 20 years, to help exporters and boost the flagging economy.
Carol Fairweather, Burberry’s finance chief, said: “The slowdown is macro. It has been driven by consumer sentiment.” She pointed to the Chinese stock market turmoil, renminbi devaluation and slowing economic growth.
She added: “But remember the Chinese customer is still travelling and shopping.” She explained that the Chinese were now going to Japan and mainland Europe to shop, rather than Hong Kong and the UK, which has been hampered by the pound’s strength against the euro.
Sales in mainland China and Asia Pacific as a whole fell in the six months to the end of September, Burberry’s first half. Asia makes up 40% of the company’s revenues.
In Hong Kong, sales crashed more than 20% in the second quarter, but Fairweather insisted that all of Burberry’s stores there were still profitable. UK fashion chain Ted Baker has also taken a hit in China and Hong Kong, saying people from the mainland were now being granted visas to come and shop only once a week.
Anusha Couttigane, senior consultant at Conlumino, said: “Weakening consumer sentiment, especially since the crash of the Chinese market during the summer, has transformed a once booming region into Burberry’s chief area of concern.”
She wondered whether Burberry may have relied too much on its heritage lines of trench coats with trademark chequered lining and scarves, but added: “With Christmas coming, the burgeoning beauty business could just have the power to revive Burberry’s wholesale fortunes.”
Burberry has moved into selling make-up and perfumes including Brit Splash and Mr Burberry eau de toilette. It has just launched a “Scarf Bar” in stores and online, which features an expanded range of cashmere scarves in over 30 colours and a short film shot at the Scottish mills in Elgin and Ayr where the scarves are made. Monogrammed blanket ponchos have been updated for the autumn/winter season in classic, prints and block colours.
Christopher Bailey, chief executive and chief creative officer, said he hoped that Burberry’s plans for the festive season – Christmas and Lunar New Year in China and Korea – would return it to a “more positive sales trend in the all-important second half”.
Retail revenues at the group rose 2% to £774m in the first half. That was below the analysts’ average forecast of £818m. Comparable sales were down 4% in the second quarter after rising 6% in the first.
The company has stepped up efforts to cut costs by £20m to minimise the impact on this year’s profits, which include a hiring freeze outside its retail operations. It expects adjusted pretax profit to be broadly in line with the average of those analysts who have recently updated forecasts, which is £445m. Previously, the average forecast was £460m.
In the US, sales slowed in the past three months, while the rest of the Americas saw double digit growth in the past six months. Europe was another bright spot: Comparable sales were up more than 20% in Italy, France and Spain which significantly outperformed the UK.
The company opened 14 standalone stores and 16 concessions in the past six months, including a new flagship store in Tokyo along with shops in Seoul, New York and Dubai.
Jeremy Cook, chief economist at foreign exchange firm World First said: “If the devaluation of the yuan and the weakness of Chinese and emerging market economies were the first shoe to drop, then the slowing of demand and sales for luxury retailers like Burberry is surely the next.
“Burberry is in an interesting position as a result of its international expansion with exposure to some of the most volatile currencies out there; everyone is focused on the yuan but the moves in the Russian rouble, South Korean won and the euro will have made trading conditions very difficult.”
This article was written by Julia Kollewe, for theguardian.com on Thursday 15th October 2015 11.17 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010