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Burberry Leans Into Local as Lockdowns Imperil October Turnaround

Covid-19 dragged Burberry’s first-half results down, but the British luxury icon managed to post a profit for the six-month period while October sales signaled the green shoots of a turnaround.

In a Nutshell: Burberry said it made “good strategic progress” in selling full-price products; expanding its leather goods assortment, which outperform its average retail comp; nurturing digital sales that have increased in the high double digits; and gaining traction with a shoppers just growing into their spending power.

“With the brand resonating and attracting new and younger consumers, we have taken the decision to reduce markdowns and this will be a revenue headwind in [the second half of fiscal year 2021] with the main impact in [the third quarter,] but will serve the long term interest of the brand,” Burberry said, stressing its outlook that it’s “well positioned to continue to drive performance and deliver growth in the medium term.”

Leadership is keeping a close eye on cash management and costs, it added.

“Though the momentum we had built was disrupted by Covid-19 at the start of the year, we were quick to adapt, while making further progress against our strategy. While the virus continues to impact sales in EMEIA, Japan and South Asia Pacific, we are encouraged by our overall recovery and the strong response to our brand and product, particularly among new and younger customers,” CEO Marco Gobbett said of first-half results.

The company over the past two year had been transitioning the brand’s positioning and product offerings, seeing double-digit comparable store sales growth ahead of the outbreak.

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Burberry said it continues to implement plans to mitigate the impact of the U.K.’s withdrawal from the European Union, noting potential duty costs and flowing goods across borders. “Our plans cover the short term impact of managing the new Customs border and extend to strategic options to reconfigure elements of our supply chain as required, particularly if there is no prospect of a zero tariff Free Trade Agreement,” it said.

Net Sales: Revenue for the six months ended Sept. 26 fell 31 percent to 878 million euros ($1.15 billion) from 1.28 billion euros ($1.68 billion) in the year-ago period. Retail sales were down 30 percent to 704 million euros ($924.6 million) from 1 billion euros ($1.3 billion), while comparable store sales fell 25 percent, versus the 4 percent gain in the same year-ago period. Wholesale sales fell 38 percent to 156 million euros ($204.9 million) from 253 million euros ($332.3 million), while licensing income decreased 24 percent to 18 million euros ($23.6 million) from 24 million euros ($31.5 million).

Sales in the digital channel saw high double-digit growth in the second quarter, and the business has helped support regions seeing second waves of Covid-19. Burberry said success depends on its ability to leverage digital to bridge online and offline, and court local customers in the absence of tourist traffic. New options, such as at-home appointments, virtual appointments and styling events offer local relevance, while it now links digital customers to store associates.

Gross margin in the half rose to 68.1 percent from 67.5 percent in the same year-ago half.

While the hefty decline in comps was the bad news for the six months, the good news was that second quarter comps fell just 6 percent versus the first quarter drop of 45 percent. The gains were from “strong double-digit growth in Mainland China, Korea and the US.” The stores in the EMEIA region, Japan and South Asia Pacific were still impacted by the “significant reduction in tourism,” the company said. It noted that the sales gain accelerated in September, down low-single digit, and turned positive in October.

Product categories that did well in the second quarter include leather goods, menswear in jersey offerings and trousers, and womenswear in dresses and knitwear. Outerwear was largely impacted by the lockdown and consumers working from home, the company said.

“With restricted travel and evolving consumption patterns, we have reoriented our business to capture opportunities in rebounding markets, localising plans and shifting resources where needed. This has resulted in higher exit rates in September compared with June and strong performance in Americas and Asia,” Burberry said. Sales in the Americas saw comps jump 21 percent in the second quarter, with the U.S. higher than the regional average and driven by growth in a younger customer base and full-price channels outperforming. Comps in Asia rose 10 percent, with strong sales in mainland China and Korea offsetting sales in other Asian markets including Hong Kong SAR and Australia.

Earnings: Profit in the quarter was 48 million euros ($63.0 million), or 12.2 pence ($0.16), down from 150 million euros ($197 million), or 36.4 pence ($0.47) a year ago. On an adjusted basis, diluted earnings per share were 4.6 pence ($0.07)  for the six months.

The company said it is encouraged by the recovery in the second quarter of fiscal year 2021, but remains cautious, with more than 10 percent of its store base closed globally following recent lockdowns in the EMEIA region.

CEO’s Take: “In an environment which remains uncertain, we will continue to deliver exceptional product, localize plans and shift resources, while leveraging the strength of our digital platform to inspire customers,” Gobbetti said.