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Burberry sudden drop offers second chance

The luxury retailer has had a good run lately, but fresh concerns over the US wholesale business sent the shares down suddenly
October 18, 2016

There are two reasons Burberry (BRBY) shares fell so sharply this week, and it has nothing to do with the group's retail sales, which have finally found some renewed momentum. On an underlying basis, retail sales grew by a comfortable 2 per cent - or 11 per cent at constant currencies - to £859m. As expected, the weak pound is paying off, sending sales up strongly during the second quarter.

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In fact, since the referendum, Burberry shares have been a strong performer, so some profit-taking on the release of the first-half update was not a total surprise. What was more of a surprise, and a nasty one, came from the wholesale division, which is struggling in the US. The macro-economic environment in North America hasn't helped a number of retailers, with footfall data consistently dreary. Burberry's wholesale partners are de-stocking, as the brand actively discourages promotions. This has already been an issue with the company's beauty range, but the problem appears to be widening.

On the licensing side, the decision to take back Japanese licenses in house - a three-year project in total - explains why revenues there crashed 54 per cent on an underlying basis.