Burberry battles slump with cost cuts as revenue falls

London / Bloomberg

Burberry Group Plc unveiled a multi-year turnaround plan based on a narrower product range, its biggest cost purge in years and a sharper focus on bags and online sales, after lowering profit expectations for the second time in a month.
Earnings for the year ending in March are likely to be near the bottom of the range of analysts’ predictions, London-based Burberry said on Wednesday, only a month after giving a similar warning. Analysts reduced profit estimates by almost 10 percent and the shares fell as much as 4.4 percent to a four-month low.
The muted outlook increases pressure on Chief Executive Officer Christopher Bailey amid concern over whether he can lead the company effectively while doubling up as chief creative officer. The CEO, who faces a struggle to boost sales due to an over-reliance on an ailing Hong Kong market, said he plans “significant changes” to save 100 million pounds ($144 million) a year and will reduce the product range by as much as a fifth.
“Creating new demand has to be at the core of Burberry’s future strategy,” Paul Thomas, an analyst at consultant Retail Remedy, said by e-mail. He called on the company to appoint “a commercially experienced heavyweight” to work alongside Bailey, joining a growing roster of analysts who think the CEO needs help.
The shares were down 2 percent at 1,120 pence at 9:33 a.m. in London, extending their decline this year to 6.3 percent.
Analysts predicting pretax profit at the high end of a range spanning 375 million pounds to 449 million pounds trimmed their estimates after the publication of results showing a second straight drop in annual earnings. The company’s guidance implies a downgrade of about 9 percent, said Rogerio Fujimori, an analyst at RBC Capital Markets.
“The external environment has remained challenging and underlying cost inflation pressures persist,” said the trenchcoat maker, which has been particularly affected by sliding demand in Hong Kong.
Burberry plans to reduce its product assortment by 15 percent to 20 percent, Chief Financial Officer Carol Fairweather said on a conference call. The company doesn’t plan to exit any categories, she said, adding that it is “moving from breadth to depth.” In bags, where the company’s sales trail peers, Burberry will increase marketing ahead of new product introductions next year.

Eliminating Duplication
Burberry now expects the benefit from exchange rates this year to be about 10 million pounds less than it predicted in April. It also doubled a performance-related pay charge to 40 million pounds, yet the CFO said the incremental amount will only be paid if management delivers on its plan.
The company plans to achieve its new annual cost-saving target by the 2019 financial year. Half of that will come from changes in the way Burberry works, by reducing complexity, simplifying processes and eliminating duplication. About 20 million pounds of costs will be taken out this year, the company said. One-time charges associated with the plan should total about 60 million pounds over the next two years.
Burberry also announced a share buyback programme of as much as 150 million pounds, starting this year, and said it will hold its dividend per share for fiscal 2017 at least in line with 2016.
The trenchcoat maker expects global luxury demand to remain subdued, growing an average low single-digit percentage a year. ”The majority of sector growth is expected to come from new and existing Chinese consumers, both when traveling and, increasingly, at home,” Burberry said.