Burberry’s 21% Profit Slide Highlights Challenges for Incoming CEO

May 18, 2017

The challenge facing Marco Gobbetti when he becomes Burberry CEO was brought into sharp focus as the British luxury brand reported a 21% drop in underlying pretax profit, hit by weak demand in the United States and Hong Kong.

Gobbetti takes over from Christopher Bailey in July, charged with strengthening the brand while improving efficiency and boosting the performance of its stores, where its space delivers lower sales than rivals.

Bailey retains creative control as Burberry (burby), best known for its distinctive trenchcoats, looks to refresh its product range, but he said his successor as CEO will take the company to "the next level as a global luxury retail and digital business."

Chief Financial Officer Julie Brown said that innovative products showcased on fashion catwalks—including tropical gabardine trenchcoats that start at 1,295 pounds—have sold well but more needs to be done.

"Our focus is on our brand, our products and returning Burberry to growth," she told reporters.

Having stripped 20 million pounds from costs last year, Burberry is aims to achieve annual savings of 100 million pounds by the end of 2019.

Currency Effects

Burberry benefited from a weaker pound after Britain's vote to leave the European Union, with adjusted pretax profit for the year to March 31 coming in at 462 million pounds, up 10 percent on a reported basis. Once currency effects were stripped out, however, the profit was down 21%.

Brown said spending by Chinese and American tourists taking advantage of the weak pound had contributed to an "exceptional" performance Burberry's home market while demand also improved in continental Europe.

However, the market in the United States remained highly promotional and sales in Hong Kong were negative for the year, she added.

The currency windfall enabled Burberry to increase its full-year dividend by 5% to 38.9 pence and it also announced a 300 million pound share buyback, funded in part by 150 million pounds of proceeds from a deal to license its fragrance and beauty products to Coty.

Shares in the company, which have risen 10% this year against a 20% rise for the sector, were up 2.6% at 16.83 pounds by 1057 GMT.

Analysts at Citi, which has a neutral rating on the stock, said that consensus earnings per share would rise slightly because the buyback more than offset currency effects this year.

Burberry said the currency boost seen in the past year would reverse this year, with current rates suggesting an adverse impact of about 30 million pounds.

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