What a difference a year makes. For the three months to the end of December 2014, Burberry’s retail revenue rose by a paunchy 15% at constant exchange rates. Yet, over the same period last year (2015), growth stood at a skinny 1% (both measured year-on-year). On paper, it looks like a disastrous turn of events in a relatively short space of time, so why is such a dismal growth rate being greeted with seemingly abundant cheer?
“We’re certainly pleased with the performance”, said Burberry’s Chief Financial Officer, Carol Fairweather.
Back in black in China
Probably with one eye on investor confidence, Ms Fairweather is keen to play any bad news down. There is more to it than that though. Her upbeat response to timid growth is a measure of just how tough the global luxury goods environment has become, so much so that Burberry is genuinely relieved to be reporting numbers that are not in the red.
The best news of all from a Burberry perspective is that the group’s key strategic market, China, returned to growth in Q4 2015, following a dip in the preceding quarter.
It may not be enough to get the champagne corks popping, but it does give some cause for cheer. Also, Burberry can claim that its strategy is driving the recovery, for example with a beefed up portfolio of personal accessories that specifically target Chinese consumers (such as army style backpacks for men).
However if we look closer at these numbers, the uptick in Burberry’s retail footfall in China almost certainly has a lot to do with the large numbers of Chinese shoppers staying at home, rather than travelling to Hong Kong and Europe. It is telling that the group’s sales in Hong Kong dropped more than 20% in the same quarter (Q4 2015 vs Q4 2014).
The key question, then, is whether Burberry’s results in China are a blip or the start of a new upward trend. And on that, Ms Fairweather is much less confident.
“I don’t think we’re brave enough to say it’s necessarily on an improving trend”, she said.
She is right to be cautious. Indeed, what Burberry’s CEO, Christopher Bailey, describes as a “tougher environment than expected” could soon get a whole lot tougher.
Burberry's Underlying Retail Revenue Growth: Q4 2015 vs 2014
Source: Euromonitor International from Burberry trading update
Notes: 1) Growth is year-on-year
2) Q4 is the third quarter of Burberry’s financial year
Personal accessories outperform apparel
A wider portfolio of personal accessories played out well for Burberry in Q4 2015. Not only did military-style rucksacks sell well in China, so too did small leather goods and scarves in Western markets (especially in the build up to Christmas). In particular, personalised cashmere scarves – on which customers can monogram their initials – proved a big hit in the US and Europe.
Overall, personal accessories outperformed the apparel portfolio and helped stave off a contraction in Burberry’s global revenue. The personal accessories segment now accounts for around 36% of group sales (see chart below).
Within apparel, it is the new products, such as ponchos, that are putting up some of the strongest growth. As with innovation in personal accessories, this is evidence of the critical need for creative new ideas in luxury goods as global fashion houses battle with an increasingly fickle and demanding consumer base.
Burberry's Share of Revenue by Product Division: 2015
Source: Euromonitor International from Burberry trading update
Note: Data is based on the group’s H1 2015/2016 (tax year) revenue of £1,105 million
Burberry needs more than digital swagger and innovations
Ultimately, of course, clever innovation will not be enough to bail out Burberry if operating conditions continue to worsen in Asia Pacific, which fuels some 35% of the group’s revenue. The small uptick in China is good news, for now. But Hong Kong and Macau appear to be in meltdown (and the group’s footprint in Japan is still too small to have any major bearing).
Added to all this, there is a slowdown in Chinese and Middle Eastern tourists shopping in Western Europe. This is bad news for the UK market, which is crucial for Burberry in Western Europe.
Burberry is always keen to big up its digital footprint, and with some justification. Among the leading fashion houses, it is a leader in digital innovation, especially with its in-store gizmos. However, digital innovation will similarly not be enough to rescue the group from a potentially damaging slowdown if Asia Pacific (and China especially) further tightens its belt.
Our view is that Christopher Bailey will have to relinquish one of his two key roles, as CEO and Creative Director, at some stage this year. If he tries to hold on to both positions, investors could get hostile. Keep in mind that Burberry’s share price has lost around a third of its value over the past year. The question is how far will it have to drop before something gives?