Burberry Profit Tops Estimates as Bailey Settles in as CEO

Burberry Group Plc’s new chief executive officer, Christopher Bailey, today outlined his vision of growth for the U.K.’s largest luxury-goods maker as he reported full-year earnings that exceeded estimates.

“Tremendous opportunities lie ahead by channel, by region and by product category,” Bailey, 43, said today at his first results presentation in London. The development of Burberry’s beauty business and a transition to fully controlling the company’s Japanese unit “offer exciting further potential.”

Bailey replaced Angela Ahrendts as CEO this month, retaining his role as chief creative officer, which he’s held since 2009. As CEO, he faces a tough task to repeat the success of Ahrendts, who more than doubled sales in almost eight years at the helm, before leaving to head retail at Apple Inc.

Burberry, which took its beauty business in-house last year, is partnering with Amazon.com Inc. and Alibaba Group Holding Ltd.’s Tmall.com to boost online sales of Brit Rhythm fragrances and other products. It also plans to take control of its Japanese business when a license expires there next year.

“The appointment of Christopher Bailey to CEO is a positive for Burberry,” Louise Singlehurst, an analyst at Morgan Stanley, said by e-mail. She has an overweight rating on the shares “given the long-term opportunities within Japan and beauty, as well as the brand’s digital initiatives.”

The shares rose 0.9 percent to 1,529 pence at 11:08 a.m. in London, giving the maker of 3,995-pound trenchcoats a market value of about 6.8 billion pounds ($11.5 billion).

Beauty Goal

Adjusted pretax profit rose 8 percent to 461 million pounds in the 12 months ended March 31, London-based Burberry said today. Analysts predicted 450 million pounds, according to the average of 18 estimates.

Burberry repeated that wholesale revenue from beauty will grow about 25 percent at constant exchange rates this year and that it is targeting “mid-teens percentage” growth in fragrances from fiscal 2016. The company, which has hired executives from companies including Chanel to help manage the business, is seeking to become a top-10 beauty brand, which would require a more than fivefold increase in sales.

Burberry, which opened its first fragrance and cosmetics store in December, plans to add more beauty boutiques and counters, Chief Operating Officer John Smith said today on a call with reporters. He declined to say how many. The company will introduce skincare products as soon as late 2015, he said.

Japan Plan

“With the team fully established and operations refined, we are well positioned to accelerate our unique vision of integrating fashion and beauty,” Bailey said. “We remain confident that our investment in beauty will be a key component of future growth, bringing a new dimension to our relationship with existing customers and connecting new audiences to the brand.”

Excluding beauty, wholesale revenue will be broadly unchanged in the six months through September, from 244 million pounds in the same period last year, Burberry said.

In Japan, the company plans to add to its four stores and 10 concessions in an effort to boost revenue there to more than 100 million pounds by fiscal 2017 with incremental profit of about 25 million pounds.

Bailey said he sees “great potential” for Burberry in Japan. In fiscal 2015, the luxury-goods maker will intensify its efforts in digital commerce, including widening Burberry’s distribution on third-party Web stores, the CEO also said.

Dividend Ratio

If exchange rates remain at current levels, the full impact on reported fiscal 2015 retail and wholesale profit will be “material,” Burberry said. Rebasing last year’s profit at current exchange rates would reduce the amount by about 40 million pounds and narrow the adjusted operated margin to about 16.3 percent from 17.5 percent, it said.

Burberry’s goal of improving margins is unchanged, though this may be hampered in fiscal 2015 by investments and potential currency headwinds, the company said.

This year, Burberry plans to open 20 to 25 so-called mainline stores, mostly in major markets and travel retail, and close 15 to 20. Three-quarters of its planned 200 million-pound annual capital expenditure will go on retail.

Burberry plans to move progressively over the next three years to a 50 percent dividend payout ratio from 40 percent, based on full-year adjusted diluted earnings per share, it said.

(An earlier version of this story corrected Christopher Bailey’s age)