Luxury goods group Burberry (BRBY) was the biggest loser on the FTSE 100 on Thursday, its shares slumping 8% to £19.36 on the news operating margins will be hit by increased investment and costs normalising in its new financial year.
This warning overshadowed the resumption of the full year dividend at 2019 levels of 42.5p on the back of strong cash generation and an encouraging sales recovery during the year to March 2021.
RECOVERY ACCELERATES
Burberry’s annual numbers demonstrated the damaging impact of the pandemic, with sales falling 11% to £2.34 billion due to lockdown-induced stores closures and adjusted operating profit dropping by 9% to £396 million, although Burberry is seeing light at the end of the tunnel.
The trenchcoats-to-cashmere scarves seller’s recovery accelerated through the year leading to fourth quarter like-for-like sales growth of 32% year-on-year, with full-price sales growing 63% in the quarter driven by mainland China, Korea and the US.
MARGIN WARNING WEIGHS
Weighing on sentiment towards the stock was the outlook statement, in which Burberry warned that ‘the exiting of markdowns’ in mainline stores will weigh on sales in the new financial year.
Furthermore, Burberry cautioned that operating margin progression will be impacted by higher costs and increased investment to accelerate growth, albeit with ‘more meaningful margin accretion thereafter’.
Famed for its iconic Equestrian Knight Device and the Burberry Check, Burberry is expected to prosper as a wealth of pent-up demand is unleashed, creating a massive boom in spending on luxury goods.
Yet there remains uncertainty over the pace of Asia’s tourists being able to get back on planes to travel to other parts of the world and spend big on items such as those offered by Burberry.
THE EXPERT’S VIEW
‘China has been one of Burberry’s best regions in the past financial year for sales,’ explained Russ Mould, investment director at AJ Bell.
‘It therefore cannot afford to upset people in the country, something that was tested earlier this year when Burberry and H&M were embroiled in a row over one of the world’s biggest cotton producing regions.’
Beijing sought to penalise Western brands that refused to source materials from Xinjiang because of accusations of worker abuse. Burberry lost one of its celebrity brand ambassadors, Chinese actress Zhou Dongyu, who criticised the business for not publicly stating its stance on cotton from Xinjiang.
‘There is clearly a reputational issue at stake and Burberry will need to tread carefully to make sure it does not upset a large swathe of customers in China, but equally it must show that it takes environmental, social and governance issues very seriously,’ added Mould.
