Burberry Drenched by Sales Miss

Shares of the iconic British luxury house dropped 16% after its quarterly sales missed analyst estimates

Burberry (BRBY.L) shares plunged nearly 16% in London trading by late afternoon Jan. 15 after the British luxury fashion house reported retail sales had fallen short of expectations last quarter and would not meet analyst forecasts for the year.

The group, which generates about 60% of revenues from retail operations, said its retail sales had increased 14% in the three months ended Dec. 31, 2007. But growth in stores open more than one year grew just 6%, below analyst forecasts of 8%. Chief Financial Officer Stacey Cartwright said it would be "a bit of a stretch" to meet analyst predictions of nearly $384 million in profits for the year set to end Mar. 31. "Investors are worried because even though Burberry reported strong figures, management mentioned tough market conditions in one of the company's key markets (Spain), high inventories, and rising costs," says Paris-based HSBC (HBC) analyst Antoine Belge.

Sales in Spain declined year over year, while Italy performed the best among European markets. U.S. retail saw double-digit growth driven by sales of women's coats, while Hong Kong and Russia's strong showings indicated potential for growth. Burberry opened one store in Hong Kong and two in Russia last quarter, and has plans for six more around the world by the end of the year.

Burberry the Latest Retailer to Get Hit

JPMorgan (JPM) quickly lowered its full-year profit estimate for Burberry to $374 million from $378 million. Still, Burberry's performance this quarter was "better than could have been feared in the current tough retail environment," London-based JPMorgan analyst Melanie Flouquet stated in a research note.

The market reaction reflects broader concern about the luxury sector as well-to-do shoppers tighten their purse strings (BusinessWeek.com, 1/11/08) in light of the weakening economy, says Seymour Pierce analyst Andrew Wade. Indeed, when Britain's largest clothing retailer, Marks & Spencer (MKS.L), announced a 2.2% drop in sales at its British stores Jan. 9, its shares tumbled by one-fifth, dragging other retailers (including Burberry) down with them.

Other European luxury stocks also fell Jan. 15 on concerns about weakening consumer spending. In late-afternoon trading, France's PPR (PRTP.PA), owner of Gucci and Yves Saint Laurent, skidded 5%; Richemont (RIFZ.F), owner of Cartier and Van Cleef & Arpels, slid 4.5%; and LVMH (LVMH.PA) slipped 4%.

Burberry achieved a major comeback last year (BusinessWeek.com, 4/16/07), after overexposure damaged its image, by removing low-end items from its shelves (BusinessWeek.com, 8/6/07) and hiring Kate Moss to pose in a plaid bikini. The trademark red, black, tan, and white pattern once sported by Humphrey Bogart in Casablanca and Audrey Hepburn in Breakfast at Tiffany's had become so popular among British soccer ruffians that the London police even named a task force after the company. Now, Burberry's comeback appears to have fallen victim to the overall slowdown in apparel and luxury sales.

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