Burberry: Disappointment and Salary Cuts

Black day for the UK company´s Burberry. It has published disappointing half-year sales, after which it decided to cut the salaries of some of its employees.

Leeson. 16/10/2015

Starting with results, sales for the fiscal first-half totaled 1,1 billion pounds (€1.5 billion), in line with the previous year and lower than expected (1.16 billion pounds). The most worrying figure for investors is the comparable sales, which showed an increase of 1% in the second quarter, the lowest since 2012 and below the expert forecasts. To further worsen the situation, Burberry has had to admit that his adjusted gross profit will fall for the second consecutive year, by 2%, which is de facto a profit-warning.

Burberry 1
Floral Cotton Gabardine Trench Coat. Click to buy

Analyzing in detail the figures, Burberry has been penalized by the weak demand in China, which has undergone a deep impact across the sector, but it´s more important in the case of Burberry because over 30% of total revenues  come from that country. However, it was unable to fully benefit from other positive effects for the industry. For example of Japan’s recovery, as it only has 2% of its business in that country. Nor it has benefited from the good performance of Europe, thanks to the weak euro against other currencies, as the vast majority of its European business is in its local market, UK. Burberry has thus been very successful in France, Italy and Spain, but having a very limited presence in these markets could not offset the poor performance of Asia.

Burberry 2
The Large Banner in Suede Leather. Click to buy

Salary Cuts and Other Measures
After publishing these results and observe the collapse of the stock price (which has reached 13% down), the company has announced some measures, mainly wages and cut costs. In the first case, it will reduce bonus and long term incentives -mainly for the management team, leading by the CEO- to save 30 million pounds. It will also apply a discretionary cost cut (such as travelling) for an additional 20 million.

Burberry 3
Grainy Leather Holdall. Click to buy

The situation is a real test for the CEO, Christopher Bailey, who has just one year and a half at the helm of the company. Today, the company´s stock price is below that when he took office. Moreover, according to Bloomberg data, it is trading at a discount of 27% vs. the FTSE-100 index, when four years ago was trading with a premium of 170%. Anyway, the truth is that Burberry has been severely penalized by its strong presence in Asia, which for years fueled its growth but now weighs on the negative side.

Burberry 4
Velvet Loafers. Click to buy

The company´s stock price has fallen as much as 13% after the announcement, but with the passing of time has moderated somewhat. The company today is worth 5.8 billion pounds, the lowest since 2013, trading at a 2015 PER of 16.8x, well below the average of the luxury sector.

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