Burberry: a luxury too far

Theory has it that tough economic times make little difference to luxury goods players. Their products tend to be the preserve of those higher net-worth consumers who are usually the most able to brush aside a downturn. Look at LVMH, for instance – helped by the growing ranks of the newly rich in Asia, it reported 16 per cent year-on-year sales growth at the half-year stage, while half-year sales at Hermès rose 20 per cent.

But not all luxury goods players are equal and it’s feasible that those with a clientele that’s a tad broader than the world’s richest – and this includes Burberry – could yet feel the pinch amidst continuing economic weakness. And, at least in the UK, consumers still look hard-pressed. True, the Office for National Statistics' latest figures – covering July – report that UK retail sales grew 1.1 per cent on the previous month. But, within that, textile, clothing and footwear sales fell 0.1 per cent – possibly leaving companies such as Burberry, which is famous for its plaid-lined trench coats, looking exposed.

And there is no shortage of examples to show that luxury players aren’t immune to consumer worries. Take Giorgio Armani, with its full-year results in July the group reported that sales had fallen 6 per cent on the year. Armani’s management thinks that the past few months, in particular, have been especially challenging. And Burberry itself has suffered plenty of pain at its Spanish business. Spain's recession has been especially severe and Burberry’s business there, with a range that's unique to the Spanish market, has needed plenty of attention in order to tackle the tough environment. That has involved replacing the Spanish collection with the group’s global offering and closing its Barcelona facility, with an associated £116m goodwill hit (that explains 2008-09’s £16m pre-tax group loss). The pain in Spain isn’t over yet, either, with City analysts expecting a loss of about £10m there in 2010-11.

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That said, there isn't much sign of trading weakness elsewhere in Burberry's empire. The group's first-quarter trading update in July contained plenty of good news, with total underlying revenues up 24 per cent year-on-year. On the retail side, the group generated double-digit comparable-store sales growth in Europe (excluding Spain), Asia Pacific, and the UK. As with other luxury-goods players, Asia is proving especially fruitful for Burberry and management expects to open between 20 and 30 stores during this financial year, predominantly in Asia and in the Americas. Although the Americas only managed low single-digit growth in the first-quarter.

That robust performance doesn't seem to have gone unnoticed amongst its rivals. During July vague rumours appeared that the owner of Gucci, French group PPR, could be interested in buying Burberry. That chatter came to nothing, however, although the speculation does appear to have helped drive the shares strongly in recent weeks – the price rose 19 per cent during July alone.