Luxury prices lift profits at Burberry

Burberry’s (BRBY) move upmarket is progressing faster than expected with profits ahead of expectations, despite Chinese sales slipping from fresh lockdowns. The trench coat maker’s adjusted operating profits grew by 38 per cent to £523mn at constant exchange rates in the year to 2 April, with margins also jumping by 160 basis points to 18.5 per cent.

Burberry is reaping the rewards of the business revamp it began two years ago, cutting costs through staff lay-offs, store closures, and slashing the levels of price markdowns and outlet sales. Since then, full-price sales have risen by 30 per cent, but growth had slowed to only 7 per cent in the three months to April.

The leather goods label said it expected margins to keep going up alongside high-single-digit sales growth in the medium term, but this outlook is “dependent on the impact of Covid-19 and rate of recovery in consumer spending in mainland China”. 

Asia-Pacific is Burberry’s largest market, accounting for £1.3bn or almost half of total revenues, but lockdowns in Shanghai and Beijing contributed to a 7 per cent drop in regional sales in the three months to April. How much longer Burberry will be able to offset this with growth in Americas, where sales rose by 47 per cent to £696mn over the last year, remains to be seen – especially since more than half of its stores, including 39 new openings, are in Asia-Pacific.

Jefferies remains “more cautious” on FY23, and forecast a 50 basis point contraction in the trading margin to 18.1 per cent. We agree, and view that Burberry’s dependence on China might cancel out some of the traditional shielding luxury brand enjoy against weaker consumer trends. Hold.

Last IC View: Hold, 1,846p, 11 November 2021.