Burberry: turnaround play requires a rain check

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Luxury brands such as Burberry hate to hear that less is more. A slowdown in luxury spending means its nascent recovery is at risk.

The British purveyor of “heritage rainwear” — posh raincoats, to the rest of us — had a difficult quarter to the end of September. Comparable store sales increased a measly 1 per cent year on year — well down from 18 per cent in the previous quarter. Worse, Burberry feels trading is still deteriorating. It now thinks it will miss its target for double-digit revenue growth this year. Analysts are cutting full-year operating profit estimates by a tenth.

None of this, Burberry will point out, is a reflection on new designer Daniel Lee’s collection. This hit the stores only in September. Beyond making reassuring noises, the fashion house would not be drawn on how the collection is selling.

Instead, it preferred to highlight the attention his new creative vision receives. Among the arm-waving metrics offered were a doubling of press mentions post the new campaign compared with those from last winter. Burberry talks about improving “brand clarity”, plus an increase of consumers who connect Burberry with “Britishness” and “Heritage”. 

Stunts such as taking over Bond Street tube station — renamed Burberry St for London Fashion Week — may deliver an aesthetic win. Translating fashion kudos into higher prices and better margins, though, is no catwalk. That helps explain Burberry’s valuation discount to the sector, which at 14 times price to forward earnings is 30 per cent, says Adam Cochrane, analyst at Deutsche Bank Research.

Burberry is small plaid compared with multi-branded goliath LVMH. The former has too much exposure to fickle fashion, rather than, say, classic handbags. And, while it has a strategy for “brand elevation”, it has not yet joined the ranks of the luxury must-haves.

All this makes Burberry more vulnerable than most to the slowdown in luxury spending. Its pace of quarterly sales growth trails the luxury pack. Only Gucci owner Kering and Salvatore Ferragamo did worse, according to analysis from Bernstein. Without a pick-up in consumption, Burberry may find its turnaround story unravels.