EUR 850.00 For Business Accounts Only

Morningstar | Burberry's distribution rationalisation positive; new design lead presents risk and opportunity.

Through strong execution, Burberry has transformed from an essentially licensed/wholesale business model with inconsistent regional product and brand presentation into a strong monobrand luxury player with consistent message, good control over distribution, and a global presence.Burberry is the category leader in its trench coat business, enabling it to generate high operating margins in this category through scale and pricing power. It benefits from a high degree of control over distribution, which allows it to correct operational mistakes more quickly, showcase the brand in key locations in global capitals, avoid excessive discounting, and retain stronger negotiating clout with wholesale partners. Although prior-year retail expansion and rent inflation have weighed on margins (selling expenses have grown 15% annually since 2009, versus 10% revenue growth), we believe Burberry has built an excellent global platform from which to execute. As space expansion moderates from 7% on average over the past six years to flat currently and new demand comes from existing stores and online platforms, operating margins and cash flows should be boosted. Rent inflation on luxury high streets should moderate from the high-single-digit increases annually since the financial crisis as vacancies rise and sales densities fall.Burberry was one of the first of its peers to invest in digital front- and back-office systems. It aggregates customer data across channels and regions, which helps it to target marketing campaigns better and can act as an input in product development and merchandising. While demand for luxury products is linked to GDP growth and an increasing number of wealthy and middle-class people, we believe Burberry and its leather goods and apparel peers could engage the existing customer pool to purchase more through product innovation. In the longer run, growth should come from China, where despite a GDP slowdown, consumption should be supported by growing wages as the labour pool shrinks. Growth should be also supported by increasing incomes in India and Latin America, where Burberry has established a presence.