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Morningstar | Burberry's Brand Relaunch Efforts Show Good Initial Response but Will Take Time to Affect Results

We are maintaining our fair value estimate for narrow-moat Burberry as the company reported results for the first half of fiscal 2019 largely in line with its guidance and our full-year estimates. We view the shares as fairly valued currently.

Revenue declined 2% at constant currency (4% growth if the beauty transition from wholesale to license is included) versus the 1.5% decline we expect for the full year. Operating margin was flat versus our expectations for a slight decline for the full year. Lower-than-expected gross margin (adversely affected by currencies, higher fashion content, and higher wholesale growth) was offset by operating cost efficiencies (affected also by phasing of costs between the two halves of the year). The company kept its cautious guidance for flat revenue and margins for the current and next fiscal year, as new designer collections will be meaningfully represented in the assortment only by autumn next year (they will start hitting the stores in February 2019). Further, despite better-than-expected current performance in wholesale, channel rationalization will continue to affect results. Our forecasts are aligned with management’s guidance, and we expect a pickup in sales growth to high single digits in fiscal 2021 and mid-single-digit growth in sales thereafter. We also see operating margin improving to above 20% from 17% in 2018, helped by positive operating leverage (growth off largely the same store base).

The company highlighted positive initial response to the new collection by Riccardo Tisci as well as product drops, which rapidly sold off. Tisci’s collection has seen good response from influencers, press, and wholesale accounts, while monthly limited "drop" collections helped attract new and younger consumers to the brand. Chinese consumer purchases grew by low single digits in the first half with no change in the second quarter, as purchasing shifted to Asia away from Europe.

Comparable sales growth in the first half came at 3% (the same in the first and second quarters), with mid-single-digit growth in Asia-Pacific, stable development in Europe, Middle East, India, and Africa (where Middle East performance remained weak) and mid-single-digit growth in Americas. Wholesale performance came in stronger than we expected with 10% growth in constant currencies, excluding the beauty shift to licensing, with growth in Asia-Pacific and EMEIA offsetting a decline in the United States.