Burberry shares extend recovery rally despite profit crash

The “Burberry Forward” strategy which the group announced in November has had an immediate positive impact, despite the factors outside of the group’s control which remain a strong headwind. 

Without question, there is some momentum building at Burberry Group (LSE:BRBY). The improved performance over the most recent part of the year dragged the group into positive territory on adjusted operating profit basis, with the first half loss of £41 million being followed by a £67 million second-half profit, leading to a positive £26 million for the 52 weeks ended 29 March and marginally ahead of the expected £11 million. Even so, the number is 94% shy of the previous year’s £418 million, and a 17% decline in revenues to £2.46 billion, while in line with estimates, shows the scale of the repairs needed.

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Burberry will want to consign the past year to the history books as soon as possible, when the change of chief executive, suspension of the dividend and first-half loss sent the shares into a tailspin. The group responded immediately and decisively, but the new strategy will take time to filter through.

The Burberry brand is one which had moved away from its traditional British traits of heritage and innovation, which had such appeal to overseas buyers and particularly tourists with an aspirational and stylish look. If the new world starts here, the group will need to regain the ground lost over recent times as competitors have moved ahead, and any such transformation will mostly come with a time lag of itself, as the revitalised brand re-enters the consumer consciousness.

The group wishes to return to a more focused and traditional luxury brand, with particular emphasis on the outerwear for which it has become traditionally known, while eschewing the more modern and niche launches which simply did not resonate with their customers. The group also acknowledges that its pricing policy, especially for leather goods, was too rich for its “category authority” in the space.

For all of the instant progress, there remains much to do, and unfortunately some of the overhang will be outside of the group’s control. Burberry points out, for example, that UK business continues to be seriously impacted by the withdrawal of VAT refunds for overseas visitors, which has led to the UK being the least competitive destination in Europe for tourist shopping.

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In addition, the group’s important Asian market is also a concern. Consumer sentiment was on shaky ground even before the reciprocal tariffs which could yet damage the US and Chinese economies, and the outlook is uncertain.

By region, the well reported woes in China have had a significant impact on the group while more generally the pressure on the luxury sector have also weighed. The Asia Pacific region is made up of 94% retail by mix and accounts for 44% of group revenues. As such, a decline of 16% in sales has had a material impact, although tourist sales are showing some signs of life with marginal growth in Japan.

The focus on costs will also benefit the group in due course. In addition to the £40 million programme previously announced, a further £60 million is expected by 2027 due to organisational changes and the combined annual £100 million of savings reflect the group’s leaner strategy and sharper focus. The outlook for the coming year is for much of the same with regard to recent performance, recognising the strength of its outerwear and scarf categories, while continuing to reignite “brand desire” and with a focus on ailing operating margins.

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Overall, the group is far from being out of the woods, but the immediate impact of “Burberry Forward” is a highly encouraging sign. That being said, the impact of the tariffs, even at the revised lower levels, will need to be closely monitored and there will need to be further proof that the current momentum can be maintained.

The share price has much ground to recover, having fallen by 29% over the last year as compared to a gain of 0.7% for the wider FTSE250, and by 67% over the last two. While the market consensus of the shares as a hold could indicate some investor reticence to jump on board the turnaround story just yet, the initial share price reaction to these numbers reflects a rare round of applause on the clear progress which has already been made.