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Burberry Battles Slump With Cost-Cutting, Share Buyback
Fashion house to make ‘significant changes’ to the way it works
after 8% fall in full-year profit
Burberry has seen a fall in sales in
markets such as Hong Kong and the U.S. and plans to find new
revenue drivers as well as cut costs. PHOTO: REUTERS
Updated May 18, 2016 7:43 a.m. ET
PLC announced a cost-cutting program and
share buyback on Wednesday as it reported an 8% fall in full-year
profit and warned that results would remain under pressure, sending
its shares sharply lower.
The British fashion house
said it would work to save at least £100 million ($144.7 million) a
year by fiscal 2019, and announced a share buyback of up to £150
million starting in fiscal 2017, its first in many years.
The moves have been
eagerly awaited by investors, who have been disappointed by Burberry’s
performance in recent months.
The company has battled a
growth slump in markets like Hong
Kong and the U.S., piling pressure on Chief Executive Christopher
Bailey—who has been juggling his duties while continuing as Burberry’s
creative head—to find new revenue drivers and cut costs.
Mr. Bailey has so far made
small cost cuts but Wednesday’s plan goes
significantly beyond anything announced
Shares were down 6.2% in
early afternoon trading in London as the share buyback was below what
several analysts were forecasting and Burberry reiterated its view
that fiscal 2017 profit would come in toward the low end of analysts’
expectations, adding that profit would be weighted toward the second
half. Expectations have moved down to £375 million from £405 million
since April, when the company said full-year profit would be toward
the low end of the range.
Chief Financial Officer
Carol Fairweather, on a call with analysts, said the company would
focus on revenue growth and investors shouldn’t expect significant
“While we expect the
challenging environment for the luxury sector to continue in the near
term, we are firmly committed to making the changes needed to drive
Burberry’s future outperformance,” Mr. Bailey said on Wednesday.
Burberry reported a net
profit of £309.5 million for the year ended March 31, down from £336.3
million a year earlier. Adjusted pretax profit, which strips out
one-time items, fell to £420.6 million from £455.8 million a year
Revenue was roughly flat,
or down 1% at an underlying basis, at £2.51 billion.
The fashion house, which
has long struggled to grow its margins, reported an adjusted operating
margin for its retail and wholesale arms of 15.4%, down from 16.3% a
Burberry said it would
save at least a £100 million a year—equivalent to about 10% of
operating expenses excluding fixed rent and depreciation—by making
“significant changes” to the way it works.
Exane BNP Paribas analyst
Luca Solca characterized the cost-savings program as “material and
ambitious,” but said he maintains his doubts over the company’s senior
Burberry said on Wednesday
that it plans to reduce complexity, simplify processes and eliminate
duplication—moves that will result in one-off costs of £60 million
across the first two years. The company said it would save £20 million
in fiscal 2017 and invest about £10 million.
Net operating expenses for
the year rose 2.6% to £1.36 billion. The company was helped by a £65
million in performance-related pay since it missed targets for the
year. Burberry said it would start to put aside money for new
performance-related pay at about £20 million a year.
Analysts at UBS recently
noted that Burberry’s operating expenses are close to 500 basis points
higher than peers, with the company hiring roughly 15% more selling
“Whilst there is clearly a
well-talked-about cost opportunity, notably from employee expenses we
believe, the bigger prize would be for Burberry to improve as a
retailer,” said UBS analyst Helen Brand, adding that Burberry could
improve staff productivity and average selling prices.
The company said in the
current fiscal year it will relaunch its website and introduce a
customer mobile app that allows mobile checkouts, among other things.
Burberry will also invest harder in training staff and hire 20% more
private client sales associates, whose role is to turn big spenders
into regular shoppers by cultivating personal relationships and
offering styling services.
On a call with reporters,
Ms. Fairweather said Burberry will reduce the selection of items it
sells in stores to sharpen its focus on best-sellers. “We are moving
from breadth to depth and it’s about really shining the light on new
products coming into the stores, tailoring the assortments for the
needs of local customers and rebalancing marketing,” she said.
She added that Hong Kong
and the U.S., two markets that have proved particularly difficult for
Burberry lately, “remain extremely challenging.”
Saabira Chaudhuri at