Burberry and the battle of the ‘it bag’

A model presents a creation from the Burberry Prorsum Spring-Summer 2016 collection. File picture: Suzanne Plunkett

A model presents a creation from the Burberry Prorsum Spring-Summer 2016 collection. File picture: Suzanne Plunkett

Published Oct 23, 2016

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Marmite may have been caught in the post-Brexit crossfire. But trench coats have lived to fight another day.

While supermarkets and suppliers have been squabbling over who foots the bill from weaker sterling, Burberry has benefited from the currency's slide.

In the three months to September 30, the British luxury goods group reported its first quarter of same-store sales growth for over a year. Burberry has made hay from the sterling slump on two fronts.

Overseas tourists have flocked to the UK to snap up ponchos and rucksacks that are now substantially cheaper, thanks to the Brexit-induced currency gyrations. UK sales from stores open at least a year were up more than 30 percent in the second quarter. That's a useful offset to still-weak markets in continental Europe, Hong Kong and Macau.

And translating its overseas business, which accounts for about 85-90 percent of retail revenues, back into sterling may add about 125 million pounds ($153 million) to full-year profits, the company said Tuesday, more than its previous estimate of a 90 million-pound benefit.

Yet this currency benefit is really not much more than window dressing. As Gadfly has argued, the brand is in need of a revamp as big as Gucci's early last year. The Kering brand's pick of little-known designer Alessandro Michele as creative director seems to have worked - loafers and double G handbags are fashionable again.

Where Burberry has been more innovative, it has paid off. Cutting-edge products sold better than the classics. The new Bridle bag was the best-selling item from the products that customers could buy straight from its catwalk show in September, demonstrating that Burberry is capable of generating excitement. But it needs to go much further.

Marco Gobbetti, the current head of Celine, will join as new chief executive next year, with Christopher Bailey, who was previously CEO and creative director, now just concentrating on design. It's not the fresh blood Gadfly has argued is needed for a transformation, but the move could still provide some much-needed creative impetus.

The company has also embarked on a slimming regime, with plans to cut at least 100 million pounds from its cost base by 2019. It has made a good start, and is on track to deliver 20 million pounds of savings by the end of March. But the plan still seems ambitious.

Then there's also the risk that Burberry's Brexit boost might only be temporary, although there looks to be no sign of the pound recovering at the moment.

The shares fell about 10 percent at one point on Tuesday, as the better retail performance failed to offset weakness in sales to department stores, particularly in the US. But they're still up 25 percent since the vote to leave the European Union, and trade on a forward price to earnings ratio of about 18 times, a slight discount to the Bloomberg Intelligence luxury peer group.

While the benefit from sterling is certainly useful to Burberry in the current difficult luxury environment, it does not change the fundamentals. Burberry needs to capitalise on its expertise in digital - where others are catching up anyway - to make more of its products must-have fashion items.

The shares ran up too far and too fast ahead of Tuesday's report, and much of the Brexit benefit is now priced in. For them to regain their historic premium to peers, more fundamental progress on the strategic challenges is needed.

Swooning over a must-have Burberry handbag will do more than the temporary Brexit bandage.

* This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

BLOOMBERG

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