Burberry Warns of Operating Loss as First Quarter Sales Sink 22%

LONDON – Burberry is taking drastic action in response to the ongoing slowdown in luxury spending, ousting its chief executive officer Jonathan Akeroyd, replacing him with U.S. retail veteran Josh Schulman, and warning of an operating loss in the first half.

In a first quarter trading update on Monday, four days earlier than scheduled, Burberry reported a 22 percent decline in retail revenue to 458 million pounds. Sales were down 20 percent at constant exchange rates.

Comparable store sales fell 21 percent in the three months to June 29, compared with an 18 percent increase in the corresponding period last year.

Burberry chairman Gerry Murphy called the quarter “disappointing,” and said that if the weakness in luxury demand persists through the second quarter, Burberry will report an operating loss in the first half. He also suspended dividend payments in light of current trading.

Burberry shares were down 16 percent to 7.40 pounds in early afternoon trading on Monday.

Murphy also signaled a change in strategic direction for the brand, which has been trying to reposition itself at the higher end of the market against a difficult backdrop. Price rises have been dizzying, and the collections under chief creative officer Daniel Lee have failed to gain traction.

The chairman said Burberry was taking “decisive action” to rebalance the offer and become “more familiar to Burberry’s core customers while delivering relevant newness.”

The intention is to bring in a “broader, everyday luxury” offer and a more complete assortment across key categories. Going forward, the focus will be on “timeless, classic attributes that Burberry is known for.”

A dedicated outerwear campaign reflecting the new direction is set to be launched globally in October.

Burberry said it will continue to improve customer conversion online with a more edited assortment and better functionality. It will also be driving “operational efficiencies and delivering cost savings to offset the impact of inflation.”

During a call on Monday, Burberry chief financial officer Kate Ferry confirmed British press reports of imminent layoffs.

She said the company is taking a hard look at its cost base and operational delivery and, as a result, “a few hundred roles globally” would be eliminated, most of them corporate jobs in the U.K. Ferry added that the company is currently in a consultation process with affected staff.

Ferry also addressed Burberry’s decision to suspend dividends, and emphasized that there were “no liquidity concerns” at the company, which has around a billion pounds at its disposal.

“Clearly we are taking a prudent approach to the dividend until profitability improves and trading picks up,” said said, adding that the decision to withhold dividends “is really about enabling us to invest in the business” until top-line growth returns.

Murphy said that all of Burberry’s moves, including cost savings, should “start to deliver an improvement in our second half, and to strengthen our competitive position and underpin long-term growth.”

It should come as no surprise that Murphy and the board picked Schulman to replace Akeroyd at the helm. Although Schulman has worked in luxury – for Bergdorf Goodman, Jimmy Choo, Gucci and Yves Saint Laurent – he also has great expertise in the premium sector, and is a merchandising expert.

Schulman was previously CEO of Michael Kors and Coach, where he also served as brand president. Industry sources have said his arrival could signal a new dawn for Burberry as “the Coach of the U.K.” with a focus on outerwear, accessories and branded apparel – and more accessible prices.

In the first quarter, Burberry saw its comparable sales decline across all the key regions. Asia Pacific and the Americas were both down by 23 percent, while the EMEIA region, which includes Europe, fell by 16 percent.

Mainland China was down by 21 percent; South Asia Pacific by 38 percent; and South Korea by 26 percent. Japan was the only Asian country growing, up 6 percent in the period.

The company said that by product, outerwear and scarves continued to perform globally. As reported earlier this year, ready-to-wear sales have underperformed.

During Monday’s call, Murphy said Burberry has faced a number of headwinds as it tries to move upmarket.

“We moved quickly with our creative transition at at time luxury market that is proving more challenging than we expected. The weakness of the U.S. market; the deteriorating consumer confidence in mainland China; stability in Europe; as well as the U.K.’s [demise] as a shopping destination have all the headwinds in our creative transition,” he said.

Like many other luxury leaders, Murphy has been outspoken in his criticism of the previous U.K. government, which cancelled tax free shopping for foreigners following Brexit. Sources have said it’s unlikely that the new Labour government will reinstate the tax perk for big-spending shoppers.

He said the share price, which has fallen nearly 60 percent over the past year and 30 percent in the past six months alone, is responding to weak current trading.

“We acknowledge our results are disappointing, but we’ve got all the plans in place to improve that and we don’t think the share price today reflects the underlying value of business in any way,” Murphy said.

He’s also upbeat about the company’s short- and medium-term prospects, and said that once Burberry tweaks its strategy and the macro-economic backdrop improves, especially in China, the company should be well on its way to recovery.

“We expect to see an improvement in trading in the second half,” said Murphy, adding that while China may be “showing relative weakness,” now the fundamentals in the medium term are very good.

“Once we see more stability in the macro environment, the stock market and the real estate environment, we expect a stabilization of demand and recovery in China, not least in Mainland China, but also across from the Chinese community as they they reengage with global travel following the pandemic,” he said.

In the meantime, Burberry will continue to pursue efficiencies as it seeks to drive up sales. And there are no plans to stop discounting – at least not yet.

Ferry said that discounting would continue to be part of the strategy. “Outlets are a really important part of our product lifecycle, particularly when it comes to the clearance of end-of-season product. They play an important role, although over time we expect to reduce our exposure to the channel,” she said.