Marco Gobbetti’s decision to reinvent Burberry (BRBY) as a super luxury brand is certainly a brave move. The new chief executive has grand plans to compete with the likes of Hermes and Dior, but repositioning Burberry into this “most rewarding, enduring segment” of the luxury goods market will be no easy task.
It’s fair to say that Gobbetti’s enthusiasm hasn’t been shared by investors, who are rightly fearful about the short to medium-term pain associated with the transition. Burberry shares crashed as much as 14% to 1,702p, unwinding all the gains made in the past month, as the FTSE 100 company said full-year sales and operating margins for full-year 2019 and 2020 were likely to be flat.
UBS analyst Helen Brand called the repositioning aggressive, with the transition period to FY20 “longer and more deep” than the market had been expecting.
There are painful lessons to heed from the experience of Mulberry (MUL), another successful British label which attempted to compete with higher end brands. Its strategy turned into a disaster, as the brand lost its army of loyal followers without sufficiently replacing them with higher end customers.
Burberry investors may well be saying today: if it ain’t broke don’t fix it. Shares have performed well this year, rising from a low of 1,039p in summer 2016 to Wednesday night’s record high at 2,024p. They currently sit around the 1,800p mark, previously a level the shares had trouble breaking above and now a key area of technical support.
The reason for the recent surge was reflected within Burberry’s half-year results, which were also released today. Clever management of costs and spending cuts drove a 17% increase in underlying operating profits, a figure rising to 28% when including £15 million of currency benefits.
UBS’s Brand said Q2 like-for-like sales growth of 5% was better than her 3% forecast, with first-half adjusted earnings of £185 million also higher than hoped for due to the sales strength and phasing of opex costs.
Brand maintains her ‘buy’ rating with a price target of 2,110p.
These are critical times for Burberry and its share price. Only two weeks ago, chief creative officer Christopher Bailey announced he will leave the business next year, having dedicated 17 years to turning Burberry into a global brand.
He also served as chief executive, a role he recently shared with Gobbetti until the former boss of French luxury brand Céline took over on his own in July.
Gobbetti’s aim is to generate high-single digit revenue growth plus ‘meaningful’ operating margin expansion. The plan will require Burberry to close those retail outlets and wholesale agreements it considers non-luxury. This will be accompanied by store refurbishments to enhance its luxury service.
Gobbetti said: “By re-energising our product and customer experience to establish our position firmly in luxury, we will play in the most rewarding, enduring segment of the market. “This will enable us to drive sustainable growth and higher margins over time, whilst continuing to deliver attractive returns to shareholders.”
It’s an ambitious plan, but when the big benefits don’t come through until 2021 the rewards may seem too far off for many shareholders.
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