Burberry Sees Tougher Environment Weighing on Margins

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Burberry Group Plc, the U.K. maker of $1,600 trench coats, said a deteriorating market will hurt profitability this year, the latest among luxury-goods companies to forecast difficulties as Chinese shoppers curb spending.

Burberry’s warning that second-half wholesale revenue will decline and that it expects “slight downward pressure” on margins sent the shares down as much as 6.2 percent, the steepest intraday decline in a year. Mulberry Group Plc slumped as much as 25 percent today after the British luxury handbag maker said it forecasts full-year earnings significantly below analysts’ estimates.

Fewer Chinese tourists have been shopping in Hong Kong because of pro-democracy protests over the past three weeks, while fighting in Ukraine and the resulting sanctions have depressed Russian spending in Europe. That points to a “perfect storm” closing in on the luxury-goods industry, Exane BNP Paribas analyst Luca Solca wrote in a note this month.

“The market does not seem to give much credit to Burberry’s sales momentum, possibly due to another year of lack of operating leverage and limited visibility on the timing and magnitude of cost reduction and margin expansion,” Thomas Chauvet, an analyst at Citigroup in London, wrote in a note to investors.

Burberry shares traded 4.6 percent lower at 1,411 pence at 9:49 a.m. in London, giving the company a market value of 6.3 billion pounds ($10 billion). The company said it expects second-half wholesale revenue to decline by a “mid-single-digit” percentage, excluding beauty products. Mulberry traded 17 percent lower at 622 pence.

Luxury Woes

This is the third time Mulberry reduced its profit outlook this year. The company, whose first-half sales declined 17 percent, hasn’t had a permanent chief executive officer for almost seven months and is also seeking a creative director.

Prada SpA last month forecast the second half of this year will be similar to the first six months, when net income dropped 21 percent and sales rose at the slowest pace in three years. LVMH Moet Hennessy Louis Vuitton SA, whose earnings also fell in the first half, is scheduled to report third-quarter sales later today.

Burberry’s retail revenue rose 8 percent to 748 million pounds in the six months through September. Comparable sales growth slowed to 8 percent in the second quarter from 12 percent in the first.

The second quarter was the first period entirely managed by Christopher Bailey, who became CEO in May. He succeeded Angela Ahrendts, who more than doubled sales in almost eight years at the helm.

Bailey’s Strategy

Under Bailey, who is also chief creative officer, Burberry has formed alliances with Amazon.com Inc. and Alibaba Group Holding Ltd.’s Tmall.com to boost online sales of Brit Rhythm fragrances and other products. Burberry also plans to take control of its Japanese business next year when a license expires.

The company will introduce skincare products as soon as late 2015 and plans to add more beauty boutiques and counters, Chief Operating Officer John Smith said in May.

Initiatives such as click-and-collect, which allows shoppers to order products online and pick them up in stores, have helped Burberry outperform its peers even as the pound’s strength and softer tourist demand in Hong Kong and Europe weigh on growth. The company said today that exchange rates have become less unfavorable and reduced its forecast for the full-year headwind to 35 million pounds from 65 million pounds.