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Burberry sees 50% slump in H1 sales after lockdowns as job cuts loom

By Frank Prenesti

Date: Wednesday 15 Jul 2020

(Sharecast News) - Luxury fashion brand Burberry said it expected first half revenue to fall by up to 50% and would restructure further as the coronavirus pandemic continued to have a material impact on sales.
The company on Wednesday said first quarter comparable sales plunged 45% to £257m with stores closed during global lockdowns, although the rate eased to -20% in June with growth in mainline China and Korea ahead of pre-Covid levels.

Burberry expects a decline of 15-20% in second quarter retail revenues, with wholesale revenues down 40-50%. The company said it was in consultation over 150 UK head office jobs and was hoping to redeploy some affected staff to reduce the number of potential redundancies.

A company spokesman told Sharecast there would also be changes outside the UK. In total, the proposed changes would impact roughly 5% of jobs globally, or 500 out of 10,000 staff.

"Based on this trading assumption, we would expect H1 2021 gross margin to decline by around 200 basis points to 300bps year-on-year and ... operating expenses to reduce by a mid-teens percentage compared to last year," the company said.

Chief executive Marco Gobbetti said first quarter sales were severely impacted by the drop in luxury demand from Covid-19 "and we expect it will take time to return to pre-crisis levels with the resumption of overseas travel".

Burberry said it planned to further "streamline" its UK office-based functions and cut jobs outside Britain, although it did not say how many jobs would go. The move would save £55m, it added.

"Subject to consultation, we expect these changes, which include office space rationalisation, to deliver savings of around £35m in full year 2021, with annualised savings of £55m and an associated one-off restructuring charge of £45m."

It said these savings are incremental to the firm's previously announced £140m cumulative cost saving programme.

TOUGH TIMES AHEAD

Burberry said "tourist flows are likely to remain negligible, and store operations are continuing to face significant headwinds", with some sites still closed or open with reduced trading hours.

Gobbetti said the firm was "encouraged by the improving trends in all regions and the promising exit rate for June. We saw an excellent response to new product launches in recovering economies as well as online".

Hargreaves Lansdown analyst Nicholas Hyett said the statement was a mixed picture from Burberry with overall sales numbers "predictably ugly", but the pace of recovery was faster than expected "with a particularly stylish turnaround in Mainland China. A 20% decline in June sales is painful but still a pretty good result all things considered".

"Unfortunately short term sales aren't expected to improve much from here, and with margins also under pressure the impact on profits may not be pretty.

"A hefty net cash position means the group is well placed to weather a downturn, but disruption to the group's emerging turnaround story could seriously undermine the investment case. With some stores likely to remain closed, travel restrictions still in place and a second wave of infections always a danger, the pain could be protracted."

Interactive investor head of markets Richard Hunter said the duration of a return to normality remained largely unknown and ongoing political tensions in the Asian region were still a concern for the company.

"Despite the recovery of the shares since the March nadir, the performance over the last year reflects these concerns, with the shares having dropped 22% in that period, as compared to a decline of 18% for the wider FTSE100."

"The market consensus of the shares has recently deteriorated slightly to come in at a weak hold, and even though Burberry is playing to its strengths as far as possible, the environment remains gruelling."

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