Burberry and Richemont hit by China Covid lockdowns

Luxury groups Burberry and Richemont have felt the impact of Covid lockdowns in mainland China in the past three months, though there were strong recoveries in Europe and both benefited from a stronger US dollar.

At Burberry, same-store sales in mainland China were down 35 per cent in the three months to the end of June but overall group sales inched up 1 per cent in the period, better than the 2 per cent decline analysts had predicted.

Richemont, which focuses on watches and jewellery rather than clothing, reported a 37 per cent fall in sales in China in the period, though taking June alone, when shops started reopening, the fall was only 12 per cent.

Burberry’s chief financial officer Julie Brown said the company entered the quarter with two-fifths of its distribution capability closed by lockdowns. “The stores reopened during June and although we still see short-term challenges we take a long-term view and we are very confident,” she said.

Brown also said the impact of Covid-19 in China so far had been practical rather than economic, though the latest data showed the country’s economy only narrowly avoided contraction in the second quarter.

In dozens of Chinese cities, shoppers must show a negative PCR test, taken within the past 72 hours, before they can enter a shop. Despite this, Brown said sales were recovering well.

Both companies turned in a much stronger performance in Europe, with Burberry’s Europe, Middle East and Africa sales rising 47 per cent and Richemont’s Europe revenue up 42 per cent after the effect of currency fluctuations was stripped out.

Brown said stores in Europe were attracting more local customers while tourist numbers from further afield were down.

Visitors from the US and elsewhere were showing a preference for mainland Europe over the UK, she added, blaming the government’s decision to scrap VAT refunds for overseas visitors at the start of 2021.

“Our data shows the tax change is hitting shopping. A large proportion of our overseas customers claimed it,” Brown said. “We hope we will get an alternative scheme.”

Burberry’s sales in the Americas fell 4 per cent, which it blamed on strong comparative figures. Richemont reported a 25 per cent increase.

Both companies are being helped by the strong dollar. Burberry said it expected this would add £190mn to full-year sales, up from a previous estimate of £159mn.

The profit impact will be slightly less, at £90mn against £92mn previously forecast. Brown said this was due to changes in product mixes.

Analysts said the trading news was reassuring but overall sales growth at Burberry still lagged behind the rates reported by luxury peers.

“From here the strategy needs to deliver on bread-and-butter revenue and earnings growth, which has proved elusive in the past,” said Piral Dadhania at RBC.

Burberry’s new chief executive, Jonathan Akeroyd, is expected to outline his strategy for the group in November.

Luca Solca, at Bernstein, said luxury fashion was benefiting from a “you only live once” attitude among well-heeled consumers that was enduring longer than many had predicted.

Deteriorating economic prospects weighed on both companies’ shares. Burberry was down 5 per cent to £16.48 in mid-morning London trade, while Richemont’s Zurich-listed shares were down a similar amount at SFr95.