Burberry suffered from investor angst Thursday as shares fell some 10% in London after CEO Marco Gobbetti announced plans to "sharpen our brand positioning," which the upscale brand said in a press release would require changes to its product, communications and customer experience. Burberry also said it will rationalize non-luxury wholesale and retail doors (essentially a pullback from department stores), with an initial emphasis first on the U.S. and then in Europe, Middle East, India and Africa. That will include refurbishing stores and enhancing luxury services, the company said.
At the center of the revamp will be more luxury leather goods and accessories to attract new customers and simplified ranges, according to a company press release. The brand also promised to be "bold" in engaging with luxury customers, relying on its digital reach, which brand intelligence firm L2 has consistently ranked among the most effective of the luxury brands.
The effort will take time and resources, and Burberry warned that "there will be a period of transition as we implement our strategy, during which we expect to remain strongly cash generative and are committed to our capital allocation framework" that will prevent sales growth until 2021.
Burberry’s ambitious plan comes as rival LVMH this week also announced an executive shuffle and promised a new era, particularly for its upscale Dior brand. And it comes just after the longtime creative director Christopher Bailey announced his departure next year.
Under former CEO Angela Ahrendts (now Apple's senior vice president of retail), Bailey was instrumental in reviving the Burberry brand after the company over-extended itself with lower-priced merchandise stamped with its iconic plaid. The strength regained under Bailey's guidance will have staying power after his departure, according to GlobalData Retail analyst Charlotte Pearce.
But the brand under Gobbetti isn't content with the progress so far. The company on Thursday noted that underlying revenue grew 4% in the six months ended Sept. 30 as reported revenue grew 9% and same-store sales grew 4%. Its adjusted operating margin in the period was up 210 basis points to 14.6%, benefiting from phasing and a significant improvement profits from beauty sales.
Burberry has struggled somewhat in the slowing luxury market, which in recent years has been hurt by a number of factors, including slowing demand in Asia. Global luxury retailers' earnings growth could nearly double in this year to 7% from 4% last year, but it's unlikely to reach the double-digit levels the sector enjoyed between 2010 and 2013, according to a report released this summer by Moody's Investors Service. Luxury companies are adapting their operations amid high competition and rising fashion risk, with some changes bolstering credit and others constraining it, Moody’s said.
The pullback from department stores, which follows similar efforts from Coach and other upscale brands, presents yet another challenge for that beleaguered sector, especially in the U.S.
Analysts for months last year had called for the upscale U.K. brand to appoint a more experienced executive to assist Bailey, who served both as CEO and the company’s chief creative officer. Last year the company answered that call with the appointment of Gobbetti, formerly chairman and CEO of French luxury brand Céline.
The brand late last year was also reportedly the target of takeover interest from Coach, which has similarly and successfully pivoted to become a more upscale brand. Last month Coach rebranded as Tapestry, positioning itself with an umbrella moniker like those of LVMH and Kering with aims to grow in the luxury space.
In a statement Thursday, Gobbetti said that now is the time for this effort, which he called the next phase of Burberry's transformation. "By re-energizing our product and customer experience to establish our position firmly in luxury, we will play in the most rewarding, enduring segment of the market," he said. "We have the foundations to build on and the team to execute our plans. This will enable us to drive sustainable growth and higher margins over time, whilst continuing to deliver attractive returns to shareholders."
Burberry provided insight into the financial impact of its plan, saying that £100 million in cumulative cost savings in FY 2019 and £120 million cumulative annualized cost savings in FY 2020 will be offset by investment and the rationalization of non-luxury points of sale, one-off restructuring charges of an expected £15 million in FY 2019, capital expenditures of £150 million-£160 million per year and a reduction in taxes by 200-300 basis points by FY 2020. In the medium term, the company expects that revenue and adjusted operating profit to grow in FY 2021, with revenue growth accelerating and "meaningful operating margin improvement thereafter" as capital expenditures will also build to £190 million-£210 million. Adjusted earnings per share are expected to grow ahead of adjusted operating profit benefiting from an improvement in the tax rate and additional shareholder distributions, the company said.
The announced plans mark the beginning of Gobbetti’s more concrete moves, suggested GlobalData Retail's Pearce. “While Gobbetti will not have been able to make his mark on tangible assets yet, his operational expertise is expected to support further profit growth in [the second half of the year] and his vision for the brand, which has been laid out today, highlights his ambitions for the future of Burberry across product, communication and experience – though little detail was provided,” she said in a note emailed to Retail Dive.
His outlined commitment to re-energizing product, stores and service, and digital innovation is essential to stimulate future growth in the U.K. and elsewhere, she also said. "Its revised strategy to reposition the brand and rationalise third party vendors is key to justifying Burberry’s luxury prices and will help to improve sales, particularly in the U.S., where department stores are failing to attract shoppers.”