Burberry delivers again #BRBY

Burberry delivers again #BRBY

This is a catch-up report for the interim results published by Burberry last Thursday.


Burberry (BRBY)

  • Share price: £20.78
  • Market cap: £8,501 million

Interim Results

Disclosure: I am heavily long BRBY.

Results from this British luxury brand were in line with guidance, and the company confirmed its outlook for the current financial year (FY March 2020).

The obvious difficulties in Hong Kong have been at the forefront of concerns in recent times. But the company appears to have shrugged them off, with the help of Riccardo Tisci (Chief Creative Officer since last year).

Key highlights:

  • Revenue +5%, with like-for-like comparable store sales +4%.
  • Adjusted operating profit of £203 million. The headline growth figure given in the summary table is meaningless, since a post-IFRS 16 measure is being compared against a pre-IFRS 16 measure.
  • Reported operating profit of £202 million.

I love how clean the accounts are: almost no difference between the adjusted and the statutory (“reported”) operating profit!

But the waters are a little muddied, I must admit, by the introduction of IFRS 16.

IFRS 16 makes operating profit bigger – since lease payments are replaced by depreciation and interest expenses, and interest expenses are always excluded from operating profit.

The company has helpfully provided these H1 results on a pre-IFRS 16 basis. On this basis, adjusted operating profit increased by only 5%.

Worse still, this includes currency gains. At constant exchange rates, adjusted operating profit fell by 4%.

What happened

Gross margin fell 110 bps, in accordance with the company’s guidance. This resulted from “the continuing investment into product quality and deeper discounts on older product lines as well as store impariments relating to Hong Kong”.

That’s all very well, but we will need to closely watch this. Gross margins of ~70% are a big part of the attraction here. Pricing power must be maintained!

Operationally, it continues to sound very positive. The company reports double digit year-on-year growth in “reach, engagement rate and followers across both Instagram and WeChat” (WeChat or Weixin 微信 is the messaging/social media app favoured by Chinese people around the world).

For Q2, Burberry reports “strong double digit quarter-on-quarter growth in our WeChat engagement rate” (emphasis added by me!)

New product (i.e. product by Riccardo Tisci) is now 70% of the total. It was a momentous change when Burberry hired him, and I think most investors will be relieved by the performance of his new lines.

Looking at revenue performance by channel, it turns out that the only segment which declined at constant exchange rates was wholesale (by contrast, retail and licensing revenues increased). I’m sure other Burberry shareholders would agree with me that it’s better to see wholesale declining, rather than the primary retail channel! Retail growth was broad-based, with only Hong Kong and the Middle East declining.

Full-year outlook

“Guidance maintained for broadly stable top-line and adjusted operating margin, despite incremental pressure on gross margin from the disruptions in Hong Kong and mix”.

More of the same, in other words, with a little bit of caution that Hong Kong will continue to pose challenges. Gross margin is expected to fall 150bps in total, due to negative mix and the loss of higher-margin sales in Hong Kong.

The publicly-available full-year EPS forecasts visible to me are:

  • FY March 2019 actual: 81.7p
  • FY March 2020 estimate: 88p
  • FY March 2021 estimate: 97.3p
  • FY March 2022 estimate: 109.9p

Balance sheet

The company has few worries when it comes to cash. It finished the half with a war chest of £670 million, which was after paying out £144 million to shareholders in the form of dividends and buybacks.

My view

The company is not cheap by any means, but it remains special. On my recent arrival in Heathrow, I noted how the company utterly dominated the advertising in one of the baggage halls. It’s a landmark brand, and the best of luxury British fashion.

Would I buy it at current levels? Probably not. But I’m glad I own it, and will look to hold it for as long as possible!

The share price has a history of high volatility during times of uncertainty, so I would expect plenty more buying opportunities for those who follow it.

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