Luxury good sales dependent on China

JAMES DAVEY
Last updated 10:17 16/01/2014

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Demand for coats and large leather bags helped Burberry top Christmas sales forecasts, though the British luxury brand said its incoming chief executive might have to cope with a hit to profit from a stronger sterling in the months ahead.

Shares in the 158-year-old firm known for its camel, red and black check pattern rose up to 7.1 per cent on Wednesday, as investors welcomed the strong sales in an industry jittery about volatile demand in China - until recently its engine of growth.

"We believe many markets are still under-penetrated for the brand," HSBC analysts said of Burberry's prospects.

The jury is out on whether sales growth in the luxury goods industry this year will match, drop or slightly outpace the 10 per cent rise recorded last year at constant currencies.

Analysts at Bank of America Merrill Lynch and HSBC are forecasting a slight slowdown to 9 per cent while others are expecting growth of 11 per cent.

Much will depend on China, where slowing economic growth and a government crackdown on conspicuous consumption have cooled demand in recent quarters.

Finance chief Carol Fairweather told reporters comparable store sales in Hong Kong, Macao were up by a "double-digit" percentage and had just returned to double-digit levels in mainland China during the period under review.

She said sales may have got a boost from local consumers buying in advance of the Chinese New Year, the timing of which played in favour of Burberry's reporting period this year.

"We are pleased with our performance in China but there is no real change in the trend," she told a conference call with journalists later on Wednesday.

Burberry's comments on the subject are closely monitored since it was one of the first major luxury brands to warn of a slowdown in China back in September 2012, sending tremors throughout the whole luxury industry.

The stock has fallen 7 per cent since October 15 when Burberry said chief executive Angela Ahrendts would step down in mid-2014 to take up a job at Apple.

She is due to hand over to long-term chief creative officer Christopher Bailey later this year who will have a dual role, although the firm named a chief design officer to assist him in his creative functions.

Bailey faces significant challenges when he takes over, including the planned integration of Japan into the group on expiry of an apparel licence in 2015, as well as growing revenue in fragrance and beauty after the firm began directly operating that business last year.

"We're in the transition phase and it's going very well," Fairweather said, referring to the management changes.

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STERLING HEADWIND
Wednesday's share price gains came despite Burberry highlighting the potential impact of the strengthening of sterling, particularly against dollar-denominated currencies, when it translates overseas profits back into sterling.

"If current rates persist we think that will adjust our profits by about £5 million ($9.8 million) through the rest of the (2013-14) year," Fairweather said.

"That's a translation impact, the underlying business remains strong," she said, adding that Burberry's guidance for its retail, wholesale, beauty and licensing businesses remained unchanged from that given in November.

Sterling has risen about 8 per cent against the US dollar over the past six months.

Fairweather said Burberry was not planning on changing its foreign exchange strategy or hedge the translation of its overseas profits.

Burberry said it had bought back franchises in Thailand, a top destination for Chinese tourists, after similar moves in China and in the Middle East in countries such as Saudi Arabia.

Burberry is one of many luxury brands, including Kering's Gucci, which are buying back franchises in emerging markets to better control image and marketing investments.

But Fairweather said Burberry planned to "remain on a franchise basis" in Latin America.

Burberry said its retail revenues rose 14 per cent to £528m in the three months to December 31, the third quarter of its fiscal year. That compared with analysts' average forecast of £520m, £464m in the same period last year and first-half growth of 17 per cent.

Comparable store sales rose 12 per cent, compared with 13 per cent in the first half, reflecting double-digit percentage growth in Asia Pacific, and mid to high single-digit growth in both the Americas and EMEIA (Europe, Middle East, India and Africa) divisions.

- Reuters

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