Though the luxury brand is confident for the future
Burberry shares sink as the tourism sector softens in the UK
- The luxury brand’s comparable sales rose by 3% and full-year guidance has been reaffirmed
- However, UK sales have been knocked by weaker tourist demand
- The Share Centre continues to recommend Burberry
Burberry’s first quarter trading update didn’t provide too many surprises as comparable sales rose by 3% to £479m and were very much in-line with analyst expectations. The new management has been implementing its strategic changes including relocating flagship stores and shutting others while the new chief creative officer brings through fresh product lines.
Growth in its online platforms continues to be strong with mobile sales now the largest platform of digital sales and the newly launched range of handbags have been popular which bodes well for the recent acquisition of an Italian leather goods and handbags manufacturer.
More importantly, its key market of Asian consumers have been returning and spending, and more of them have been spending in their home locations in Hong Kong, China and Japan rather than travelling abroad. This has helped sales in the Asia Pacific region grow in the mid-single digit percentage points. There was also positive footfall in the US helping the Americas sales increase in the high single digit percentage points.
However the share opened lower by nearly 5% as it emerged that sales in the UK and Europe were impacted by softer tourist demand while macro-economic conditions continue to pressure sales in the Middle East. Management also indicated that the tailwinds of a weak sterling were fading but they were confident enough to maintain full year guidance.
Over the last two years Burberry has staged a good recovery helped by cost cuts, restructuring and macro-economic improvements in its key Asian markets. Cost cuts and other strategic initiatives are still ongoing and should be welcomed by investors along with the £150m share buyback scheme. But strategies, such as taking the brand even more upmarket, have the potential to backfire and alienate traditional customers as we have seen with other brands in the industry. Meanwhile with the share price having done well over the last two years and the shares trading at a price to earnings ratios of 26x, we continue with our ‘hold’ recommendation.
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