Photographer: Simon Dawson/Bloomberg

Burberry Cleans Up Its Wardrobe to Make Way for a New Chief

  • Awaiting CEO Gobbetti, trenchcoat maker streamlines brands
  • Profit decline stems from moves to elevate image: CFO Brown

Burberry Group Plc says a sleeker cut will help Chief Executive Officer Marco Gobbetti lift the brand’s image when he takes over in July.

The U.K. trenchcoat maker said Thursday that it has sacrificed some sales in the short term in order to strengthen its luxury credentials in a bid to raise profitability down the road. Planned cost cuts are on track after it streamlined its product offer and took other steps to rein in a business whose underlying profit has declined for three straight years.

Marco Gobbetti

Source: Burberry Group Plc

“These changes can sometimes be challenging,” current chief Christopher Bailey said in a presentation to analysts and investors, adding that Burberry “has started to work differently and to build for the future.”

The Burberry that Gobbetti inherits has underperformed rivals, including LVMH and Gucci owner Kering SA, amid a nascent revival in the luxury industry that’s driven by gains in China and a tourism revival in Europe. The U.K. company has been hurt by its exposure to the U.S., where retailers are struggling as consumers skip trips to the mall in favor of shopping online.

Burberry’s shares rose as much as 3.4 percent as it said it’s progressing toward a goal of cutting costs by 100 million pounds ($130 million) a year by 2019, in a bid to shore up the U.S. operations and move upmarket. The company has merged three sub-brands -- London, Prorsum and Brit -- into its main label over the past year.

Department Stores

The company withdrew from department stores in non-premium locations, notably in the U.S., and shortened its clearance period in an effort to bolster its image and selling prices. That contributed to a decline of 14 percent in wholesale revenue during the latest fiscal year.

The cost cuts have included moving 300 jobs from London to a business services center in the grittier northern English city of Leeds. Burberry will focus on store productivity in the upcoming year, Brown said, with no net increases in retail space planned.

Burberry has also offloaded its beauty business, announcing a licensing agreement with Coty Inc. in April. Cash from that deal will partly fund a new share buyback of 300 million pounds to be completed in 2018, the apparel company said Thursday.

In tough times for mainstream retailers, Burberry’s move upmarket could help it in markets like China and India that have a growing number of young, aspirational consumers, according to Michelle McGrade, chief investment officer at TD Direct Investing.

“Burberry is in an excellent position as an established and sought-after brand,” she said. “However, it still needs to work hard to keep its image at this level.”

Bailey said the company had taken a more strategic approach to design, focusing on developing flagship products with the potential to win market share. He’s set to hand over the CEO title to Gobbetti, former head of LVMH’s Celine, while retaining his role as creative chief. In another move to strengthen its luxury image, Burberry in March brought in Dior accessories designer Sabrina Bonesi to lead design for leather goods and shoes. 

Runway Fashions

Bailey said he was pleased with the early performance of the new DK88 bag launched this spring, as well as sales of a lightweight version of the brand’s iconic trenchcoat. Sales of runway fashions, which command a premium, were up 25 percent for the latest fiscal year.

Burberry reported adjusted pretax profit of 462.4 million pounds ($598.8 million) for the fiscal year ended March 31, exceeding the average analyst estimate of 457.1 million pounds even though the underlying result was lower.

Chief Financial Officer Julie Brown said the less-is-more approach was helping customers focus more clearly on a reduced number of product introductions.

“We moved to one label so customers could see the fashion and newness more clearly,” she said on a call.

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