Burberry’s slowdown

Some had hoped for another Bottega Veneta effect. «But the extraordinary success, first in the media and then commercially, that Daniel Lee’s creative direction brought to Kering’s brand from his debut has not yet been repeated», an anonymous analyst told MFF. Thus, Burberry’s ceo Jonathan Akeroyd’s target of 5 billion pounds in revenue appears increasingly out of reach. «To meet that goal by 2030, Burberry would need to grow at about 7% per year from now until then», Swetha Ramachandran, who manages the leading consumer brands strategy and is co-manager of Artemis’s global select strategy, explained to MFF.

«Between 2014 and 2019, Burberry saw a revenue growth rate of just over 3%. To boost that, they need to show proof soon that the brand’s elevation strategy is working to start reclaiming market share. Realistically, it might take a decade to reach that target with more stable growth». Meanwhile, the Company is set to announce its fourth-quarter 2024 results on May 15.

Following its latest profit warning in January, the second downward revision in three months, the British Fashion House reduced its profit forecast to between 410 million pounds and 460 million pounds (equivalent to 478.8-537.2 million euros at today’s exchange rate) due to a decline in demand for luxury goods. As a result, the outlook for the end of the fiscal year appears negative. The fourth quarter is expected to decline by 14% year-on-year, according to Barclays, and by 13% according to Goldman Sachs and Morgan Stanley, from 684 million pounds (798.8 million euros) in revenue for the previous fiscal year. Analysts believe that the final three months will weigh heavily on the whole fiscal year, pulling revenue back below the 3 billion pounds (3.5 billion euros) threshold crossed in 2023.

According to Barclays, «the Group’s turnover for fiscal 2024 is expected to drop by 1% to about 2.94 billion pounds (3.43 billion euros), while annual ebit could fall by 7% to 413 million pounds (482.3 million euros), with a margin of 14.1%». Barclays maintains an equal weight rating on the stock but has lowered its target price from 14.6 to 13.4 pounds (15.6 euros). However, this is still an upward outlook, given that the stock is trading above 11 pounds. «Burberry’s recovery is still in its early stages, with some risks in execution. Although the new management team has strong credentials, a worsening macroeconomic environment, especially in America, could impact the Brand’s recovery».

Burberry’s stock has deteriorated significantly in recent years, losing more than 50 percentage points over the past 12 months, resulting in a loss of 13 pounds in value per share, and dropping more than 15% since the beginning of January 2024. Over five years, the decline has been over 38 percentage points, leaving its market capitalization at 4.25 billion pounds (4.96 billion euros). Morgan Stanley also rates Burberry at equal weight and has lowered its price estimates from 13.5 to 12.5 pounds (14.6 euros).

«We are revising our growth and profitability forecasts downward, as we anticipate that Burberry will continue to underperform in the luxury segment», analysts from the investment bank explained. «Our projected ebit for fiscal 2024 has decreased from 422 million to 405 million pounds (almost 473 million euros) compared to a consensus of about 430 million pounds. For 2025, it drops from 411 million to 376 million pounds (439.1 million euros)». Goldman Sachs, which is maintaining a neutral stance, cut its target price by 2%, from 16.6 to 16.3 pounds (19 euros), with a 2024 ebit estimate of 407 million pounds.

The drop in market expectations for Burberry has largely been influenced by Kering’s disappointing results, which revealed a weak performance by Gucci, «another brand undergoing a transition with new contents and a new creative director», Goldman Sachs noted. Bank of America (BofA) analysts also caution about «turnaround stories like Kering, Burberry, and Salvatore Ferragamo». According to Morgan Stanley, Kering’s recent first-quarter financial results indicate an ongoing weakness among brands with high exposure to aspirational consumers and undergoing creative transitions, with challenging shifts in a complex environment where customers are becoming increasingly selective.

«Industry insiders we have spoken with indicate that Burberry’s new products are struggling to gain momentum. We saw some positive signs in the reception of Daniel Lee’s February show, but this collection will not hit stores until September», Morgan Stanley notes. The historic British brand is «trying to revamp and relaunch at a time when the overall consumption of luxury goods is slowing», Aurelie Husson-Dumoutier, an analyst at HSBC, recently explained, noting that the timing «is not ideal» for a turnaround.

Ramachandran points out that Burberry’s situation is somewhat similar to Gucci’s, as both are attempting to elevate their brands to attract a higher-spending audience more resistant to macroeconomic headwinds by raising their prices. «Both are doing this in a luxury market that is decelerating compared to the extraordinary growth of 2021-2022 and becoming increasingly polarized, with strong brands like Moncler and Prada taking the lead», the expert explains. «While Burberry has a strong heritage and is only two years younger than Louis Vuitton, having been founded in 1856, its new creative vision has not fully taken hold yet».

According to Ramachandran, the brand’s traditional strength among aspirational buyers, especially in the US, has turned into a weakness due to restrained spending in that group. «However, there is potential for recovery once inflation and interest rates peak in the US, which could lead to a resurgence in spending. But that will require some patience».

As with Kering, the sequential slowdown from the third quarter is likely due to trends in the Asia-Pacific region, particularly in mainland China, where the comparison base is challenging. The Emea region and the Americas, on the other hand, are expected to show trends similar to the third quarter. «A problem for Burberry, which, unlike most of its luxury competitors, does not have a controlling shareholder, is that high management turnover has limited the time needed for strategic decisions to produce results», the Artemis analyst continues.

Before ceo Akeroyd’s arrival in 2022, his predecessor Marco Gobbetti, now the ceo of Ferragamo, held the position for just five years, along with Riccardo Tisci as creative director. Last fall, Kate Ferry stepped in as chief financial officer, replacing Julie Brown. The absence of a controlling stake and a 100% free float have made Burberry a frequent target for acquisition speculation.

«Burberry’s shares have been undervalued for some time, even though their discount relative to the sector has widened over the past year. This could, in theory, make the Brand an attractive target for a well-funded company willing to invest in a turnaround away from public market pressures», Ramachandran adds. «However, the Federal Trade Commission’s objection to the Tapestry-Capri merger raises concerns about whether it might discourage M&A activity for existing luxury conglomerates, which might be hesitant to pursue mergers if there’s a risk of facing a similar blockage in the US, the world’s second-largest luxury market. Additionally, we do not see private equity as the right partner for a long-term investment in the brand, given its history of focusing on cost-cutting».

Consumer perception has also shifted considerably in recent years. «Think back to the hype surrounding Burberry during Christopher Bailey’s tenure as creative director from 2015 to 2017, before he left in 2018 after 17 years», the anonymous analyst interviewed by MFF concludes. «Along with former ceo Angela Ahrendts, Bailey managed to transform the trench coat Maison into one of the most recognized and desirable luxury brands, pushing revenue to 2.5 billion pounds by 2014».

Besides Bailey’s vision, about a decade ago, Ahrendts’ strategy played a critical role for the company. Before leaving to join Apple, she accelerated Burberry’s digital strategy. «In an era when omnichannel was still a novelty, Burberry reinvented its flagship store in London’s Regent Street with giant displays and virtual tools for visitor interaction. It had a vibrant social media community and created high-quality digital content», the anonymous expert recalls. (All rights reserved)