Ahead of Burberry’s quarterly results, Jasper Lawler analyses the prospects of future growth for the company in China and the emerging markets. Within the report Jasper discusses: • How CEO Angela Ahrendts’s change in business strategy impacted sales • How the strength of the sterling could affect international sales • Expectations for Burberry’s earnings and the future impact of a new CEO Not too long ago, Burberry was more likely to be associated with the less savoury aspects of British and celebrity culture and that was new CEO Angela Ahrendts’ challenge when she took over the brand in 2006. It is a testament to her stewardship that the brand has been transformed to being synonymous with supermodels and high-priced luxury fashion, and 40% of revenue is now generated from exports to Asia and that will be her legacy. The change of strategy made sense. At the beginning of 2009 with most of the western world in the depths of recession, it was only the wealthy that could afford to spend, and the wealthy spend on luxury items. Nowhere was this more apparent than in China where a new emerging middle class not only had the wealth, they wanted others to know they were spending it. They did this through the luxury goods they bought, particularly the clothes they wore. Sales tripled under Ahrendts tenure to £1.8bn, which by 2013 made her the highest paid FTSE CEO with a £16.9m pay package. The rate of growth in China has slowed recently with retail sales growing 11.8% annually below expectations of 13.5% as of February. This is still much faster growth relative to any developed nation so the slowdown is hardly reason to adjust the Asian-focused sales strategy. Luxury competitor LVMH Moet Hennessy Louis Vuitton is doing just fine. The company just reported that revenues on its fashion items climbed 9% in the first quarter of 2014. However it also noted currency fluctuations knocked 5% off the quarter's growth. With headquarters in the UK but customers and manufacturing facilities in the Eurozone and China, the recent strength of the British pound relative to the euro and Chinese renminbi could negatively impact Burberry’s international sales. The higher the pound relative to Asian currencies, the relatively less competitive the exports become to comparable local products, not to mention each sale is worth less when converted back to pounds. However, the advantage of luxury products are that they have a lower price-elasticity of demand, meaning a change in price has a relatively small effect on the decision to buy when compared to more essential items. The company also hedges its international currency exposure. A bigger obstacle might be the changing consumer environment in China. More sophisticated tastes and anti-corruption charges hampering the once wide practice of gift-giving in China have seen buyers shy away from the flashy brand labelling of old. This brings with it a host of new alternative fashion line competitors, not least from local Chinese designers increasingly confident in their own national style. Revenue growth for Burberry slowed last year ending March 2013 and profits dropped. The third quarter saw sales increase by 14% with comparable sales up 12%. Earnings per share are expected to grow 7% to 76.68p annually on revenue of £2.33bn. Given last year’s performance, the slowdown in Chinese retail sales and the loss of their pioneering CEO Angela Ahrendts, the forecast does appear a bit of a stretch. Burberry seems to be alive to the challenge. By placing their Creative Director Christopher Bailey as the new Chief Executive, the company’s overall strategy has a better chance of quickly adapting to the creative changes needed to make further headway into China and the rest of Asia. Bailey has no experience as CEO so there is nothing to judge his ability in that role which does leave investors with a certain degree of uncertainty. Following this week’s results, Burberry will report first quarter earnings on May 21st - the first under new management. Mr Bailey will be under particular scrutiny and particular emphasis will be placed on his strategy and its impact on the company’s earnings now and going forward. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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