Luxury fashion brand sees reported profits more than halve as multiple external factors damage sales
Burberry cuts dividend as pandemic hits its bottom line
- Prior to the outbreak, revenues were up an encouraging 4%, but store closures in the fourth quarter saw like for like sales plunge 27%, leaving full year sales down 3%
- Along with the store impairments, inventory provisions and other charges related to coronavirus, reported profits more than halved to £122m
- Shares opened up positively as sales were less severe than expected, despite a dividend cancellation
- Recommendation: Given the uncertainty and likelihood that luxury shopping will become less important in the ‘new normal’ we maintain our Hold recommendation
It has been turbulent year for Burberry mainly due to external factors. While it handled the disturbances from the Hong Kong protests well, there was no way of skipping around the coronavirus outbreak which first hit the Far East, one of its most important markets. Prior to the outbreak, revenues for the first nine months of the year were up an encouraging 4%, but store closures in the fourth quarter saw like for like sales plunge 27%, leaving full year sales down 3%. Along with store impairments, inventory provisions and other charges related to coronavirus, this has seen reported profits more than halve to £122m.
Burberry had already flagged that they faced a disastrous scenario, but Q4 sales were less severe than feared and the shares opened up positively. This is despite the final dividend being axed to save on cash flows, although some investors may have priced this in with dividends cuts now being the norm. Some encouragement will be taken for the most recent update on trading activity in the Far East where April sales are ahead of the prior year.
However, they are naturally cautious about the upcoming year and how customers will react as lockdowns are lifted across the world. Half of their stores are currently closed so 2021 will likely get off to a bad start. This could see their digital platform become ever more important, although little has been said about how online sales have been doing. There is also the view that travelling consumers, a key demographic for Burberry, may take longer to resume spending. At times of economic strife, luxury spending by the mass affluent is likely to be something to be given up. These factors lead us to be fairly cautious about investing in Burberry. We maintain our Hold recommendation.
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