- Both luxury goods groups enjoying buoyant sales

- Burberry outlook hinges on recovery in China

- Watches of Switzerland has considerable overseas opportunity

Well-heeled shoppers are shrugging off the inflationary pressures seen around the world if the latest updates from luxury goods groups Burberry (BRBY) and Watches of Switzerland (WOSG) are anything to go by, with both businesses enjoying booming sales.

Shares in FTSE 100 fashion house Burberry were 0.25% easier at £15.80 despite the trench coats-to-cashmere scarves seller strutting in with a better than expected 38% rise in adjusted operating profit to £523 million for the year to 27 March 2022.

RECORD REVENUE

Revenue rose 23% to a record £2.83 billion in the face of a ‘continuing challenging external environment’.

Burberry’s gross margin expanded by 60 basis points to 70.6% thanks to higher full price sales and price rises, which demonstrate the strength of the brand.

Burberry, where new chief executive Jonathan Akeroyd has now taken the reins, also maintained its medium-term guidance of high single-digit sales growth and ‘meaningful margin accretion’.

However, the luxury leader also warned its outlook hinges on how quickly consumer spending recovers from Covid lockdowns in mainland China and conceded its London performance, heavily reliant on tourist footfall, has remained ‘weak’.

STRONG MOMENTUM

As for Watches of Switzerland, its shares softened 2.4% to 969p despite reporting a 40% surge in sales to a forecast-beating £1.24 billion with improved profitability for the year to 1 May 2022, with bumper revenue growth of 48% in the fourth quarter.

Watches of Switzerland also upgraded its guidance for 2022 adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation) to between £160 million and £164 million and said it enters 2023 with ‘strong momentum’, expecting that the disruption from the pandemic is ‘now largely behind us with ongoing recovery in footfall and airport traffic’.

The company’s guidance for 2023 suggests sales can grow to between £1.45 billion and £1.5 billion.

SUPER HIGH DEMAND

Chief executive Brian Duffy commented: ‘We delivered an outstanding performance in both the US and UK, supported by broad-based sales growth across our portfolio of world leading partner brands and driven by domestic clientele.

‘We were also delighted to announce our forthcoming entry into the European market, which will provide our group with further growth opportunities and geographic diversification.’

Duffy said the luxury watch and jewellery markets are ‘dynamic’ and the group’s ‘investment-led model continues to gain positive momentum. Consumer desire for “Super High Demand” brands (Rolex, Patek Philippe and Audemars Piguet) continues to exceed supply and other luxury watch brands are enjoying exceptionally strong demand and sales. Luxury jewellery demand is also very positive.’

THE EXPERT’S VIEW

AJ Bell investment director Russ Mould commented: ‘Burberry’s post-Covid recovery still has more to go, given it should see greater business once Asian tourists start travelling the world again. They have historically been keen buyers of Burberry products on their travels. China’s Covid resurgence is a headwind for now, but one might presume this is only a short-term issue.

‘Watches of Switzerland has done extremely well in the UK and US and is now expanding into Continental Europe, suggesting there is still a considerable growth opportunity for the business.

‘Marketing is key to both Burberry and Watches of Switzerland as it’s all about portraying the right image to potential buyers. Judging by recent results, both are doing this with great success.

‘A year ago, there was talk we could see a new era of spending under the banner of the “roaring Twenties”. Wealthier individuals stuck indoors during the pandemics would be itching to return to their former lavish lifestyle of yachts, weekends away and flash parties.

‘There is every reason to believe this will still happen, even against a backdrop of high inflation. Therefore, it is easy to see why luxury goods companies remain relatively upbeat when so many other businesses are way more cautious about consumer spending.’

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.

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Issue Date: 18 May 2022