Burberry's Slimming Regimen

Bailey needs a hot new designer to turn around sales

Burberry is getting down to a size zero. But reaching its target weight won't be enough for investors.

The British luxury brand has announced plans to strip at least 100 million pounds ($144.1 million) from its cost base by 2019.

Unlike the models on its catwalk, it certainly has some fat to cut. Operating expenses almost doubled between 2011 and 2015, according to Bloomberg data, but profit hasn't kept pace.

Rising Costlines

Burberry's operating expenses have almost doubled over the past five years

Source: Bloomberg

For the year to March 31, the operating margin fell to 16.6 percent from 18 percent the year earlier, trailing some rivals such as Salvatore Ferragamo.  

Slimming Down

Burberry's operating margin in the first half of 2015 trailed that of most clothing-focused rivals

Source: Bloomberg Intelligence

Pressure on profits is expected to continue as sales slump -- Burberry warned they would be toward the bottom end of its 2016 projected range of 375 million pounds to 449 million pounds -- so the cost cuts are necessary.

But like a Burberry cashmere scarf, they won't come cheap. The company expects to incur one-off, largely cash, charges of 60 million pounds over the next two years.

It’s a good thing Burberry has a strong balance sheet -- it had net cash of 660 million pounds at March 31. That should allow it to meet the costs and fund the 150 million pound share buyback it also announced on Wednesday. 

Shareholders deserved a look-in, as their patience has been tested by a 37 percent price drop over the past year, underperforming Bloomberg Intelligence's global luxury goods index.

But with the stock trading on a forward price earnings ratio of 16 times, below the BI luxury average of 17 times, pressure is mounting on chief executive and creative director Christopher Bailey to find some flair.

He's announced useful initiatives to increase sales, such as relaunching the website and making it easier to shop via mobile. While these will also cost up to 60 million pounds over the next three years, they are necessary to target customers local to stores -- not just the high-spending tourist shoppers.

These are welcome steps, given that Burberry has to learn to live without the wave of Chinese luxury consumers who have swelled its sales for the past decade.

But he needs to do more, and indeed, investors don't seem convinced by the strategy -- the shares fell 2.5 percent on Wednesday.

What Burberry needs is a fundamental style overhaul.

Burberry will revamp its product range, starting with bags. It will cut the number of individual lines by 15-20 percent, to enable its most fashion-forward pieces to shine, and it will throw more advertising muscle behind them.

Bailey needs to go further. He's already got plans to do so, and will tackle other product lines after revitalizing handbags.

He can't rest on the iconic trenchcoat, nor recent wins with ponchos and rucksacks. There are few products that have captured the fashion pack's imagination, and this is the central problem with the company's offerings. 

When a big fashion house gets to this point, it's time for new blood. As Gadfly has argued, Burberry should appoint a new designer to support him, to add fresh impetus to what is looking like an increasingly tired brand.

Burberry's reinvented itself before, and it needs to do so again.

But they shouldn't let Bailey go -- as CEO he's on the right track. He's got a clever digital strategy and his push into beauty is a good way to tap new, younger shoppers with accessible products. 

Bringing in new creative talent might mean even higher costs in the short-term. But without it, Burberry risks falling even further out of fashion.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Andrea Felsted in London at afelsted@bloomberg.net

    To contact the editor responsible for this story:
    Jennifer Ryan at jryan13@bloomberg.net

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