Burberry CEO's Upscale Vision Leaves Investors Feeling Poorer

Updated on
  • Shares plunge as Gobbetti outlines strategy for luxury brand
  • No news on creative director to succeed departing Bailey
Bloomberg’s Eric Pfanner reports on Burberry CEO Marco Gobbetti’s plans to expand upmarket luxury offerings.

Four months into the job, Burberry Group Plc’s new boss presented his vision for the company. Investors didn’t like what they heard, sending the stock tumbling the most in five years.

The problem: Marco Gobbetti’s new Burberry looks like a more expensive version of the existing one. The new chief executive officer promised to move a company known for utilitarian trenchcoats “firmly” into high-end luxury, but that’s going to cost Burberry as he weeds out underperforming shops and spruces up those that remain with a snazzier lineup of handbags.

Gobbetti also lacks the person to design those it-bags, after creative director Christopher Bailey announced his departure last week. Burberry warned investors not to hold their breath waiting for the company to fill the post.

Burberry’s plan “will require substantial reinvestment and a two-year transition period to reinvigorate the fashion content in the product offer,” RBC analyst Rogerio Fujimori said in a note. “A lot of time and patience should be required from investors.”

Gobbetti’s plans mark an evolutionary shift from the approach pursued by ex-CEO Bailey. Under its former chief, the company had already moved to reduce its exposure to mass-market retail outlets in the U.S., where its image has been diluted by wide availability and extensive discounting, and streamlined its brand offering.

For Gadfly analysis of Burberry’s strategy, click here

Investors were expecting more radical steps from an industry veteran who previously revamped LVMH’s Celine. Gobbetti, working with designer Phoebe Philo, gave the French fashion and leather brand an upscale gloss with a lineup of must-have handbags.

Burberry shares fell as much as 14 percent after the company said revenue and the operating margin will be flat in 2019 and 2020, with 15 million pounds ($19.7 million) of restructuring charges expected in the first of those fiscal years.

‘Brand Awareness’

“Burberry, in terms of brand awareness, is one of the top, top brands,” Gobbetti said at a briefing in London. “We have no intention of alienating our customer base. But we also have the opportunity to capture some customers from other players and we will do that with a new creative vision.”

In expanding its handbag lineup, Gobbetti is borrowing a page from his strategy at Celine as well as LVMH’s Louis Vuitton division, where leather goods have served as the cash cow.

Burberry’s new $2,500 DK88 bag is priced comparably to offerings from some high-end luxury brands, while polo shirts and other items in the company’s lineup cost only half as much as rival offerings.

“We are creating relevant product to recruit the new fashion client,” merchandising chief Judy Collinson said. “One of the most visible ways Burberry can renew brand perception is handbags. Handbags are a sign of prestige.”

Gobbetti’s plan could cut earnings by 15 percent for fiscal 2019 and 2020, Morgan Stanley analyst Elena Mariani said in a note. The store refurbishments and other upgrades will result in capital expenditure of 150 million pounds during those years, Burberry said, with an increase to as much as 210 million pounds in the medium term.

Finding a new creative director to replace Bailey will “take some time,” Gobbetti said, declining to comment on speculation about candidates.

Strategic Deals

Burberry said Thursday that first-half revenue rose 4 percent on an underlying basis, above analyst expectations. Growth was strongest in the company’s own stores in the Asia-Pacific region, the company said.

The drop in the shares came after the stock rose to a record earlier this week when Kevin Wills, chief financial officer of Tapestry Inc., formerly known as Coach, said the New York-based company is seeking strategic acquisitions.

“Burberry’s premium valuation already discounts an overly optimistic view on brand turnaround potential, of which visibility is still limited,” Bank of America Merrill Lynch analysts led by Ashley Wallace said in a note.

— With assistance by William Canny, and Lisa Pham

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