Burberry struggles to revitalize its business through a turnaround plan. The high-end, UK-based luxury clothing company, known for its signature beige check pattern, is failing to resonate with consumers, especially Chinese ones.
Last week, Goldman’s Louise Singlehurst told clients that the troubled designer has a “lack of catalysts for top-line stability” and remains “Neutral” on the company.
In mid-June, Singlehurst said that even with Burberry’s leather goods more accessible at entry-level price segments compared to luxury peers, recent price reductions on new handbags and clothing still suggest a challenging sales environment:
Looking at our pricing analysis, we show that Burberry’s leather goods offer has greater exposure to more entry level price segments when benchmarked versus the luxury peers (it has the largest offer of handbags below €1500). In addition we show the brand is targeting the higher priced segment with new product launches (adding to the €2000+ segment and now the €3,000+) over the past 18 months. However, our pricing tracker shows price reductions on a small selection of new handbag silhouettes (using data from June 5th versus April 30th) which are designs introduced by new Creative Director (Daniel Lee). We have observed only a small selection of price adjustments (5 styles, mainly within the Knight Bag and Rocking Horse designs) with a range of -4% to -16% in Euro and GBP (with the medium-sized Knight Bag in black leather seeing the largest reduction at -16% to £2,090). Whilst this does suggest that Burberry is actively reviewing its product offer and pricing architecture – a positive in our view – it does also suggest the sales environment remains challenging and Burberry is yet to reverse market share losses.
In May, CEO Jonathan Akeroyd told investors, “FY24 financial results underperformed our original expectations.”
Revenue has been sliding in the Chinese market, and that suggests consumers in the world’s second-biggest economy are giving up on the brand’s overpriced handbags and jackets.
“The Burberry brand doesn’t have, at the moment, the ability to resonate,” Luca Solca, a senior analyst at Bernstein Autonomous LLP, said, adding, “It either needs to change or it needs to work.”
As The Telegraph reports this weekend, that change involves hundreds of potential job cuts as the turnaround plan falters.
As many as 400 jobs could be at risk. Here’s more from the report:
Employees were first informed of the restructuring during a Zoom meeting in late June, with affected workers told they were either facing redundancy or having to reapply for their roles. The company has begun a 45-day consultation, signalling that hundreds of roles could be cut.
It is understood that union officials are coordinating redundancy settlements with a select group of employees. The company refused to say how many workers will be affected, but employees fear up to 400 jobs could be at risk.
Bloomberg data shows that Burberry has about 9,200 full-time workers, which provides some context on what the upcoming job cuts mean for the workforce as a whole.
Solca said, “One can only think that the Burberry reinvention has yet to succeed.”
He noted that Burberry’s low valuation, compared to that of its peers, could attract M&A activity.
A “buyer could undertake the grisly but arguably necessary measures to stabilize the Burberry brand away from the prying eyes of the public markets,” he said.
Goldman’s Singlehurst told clients last week that Burberry could be ripe for M&A with larger brands:
Small listed brands now in an M&A sweet spot: In the last 15 years, small brands (BRBY, SFER, ZGN) are trading at the largest discount relative to brand scale (12mf EV/GP or EV/Sales basis) vs. larger cap peers. We believe the market has been trading these businesses on standalone profitability, which is under increasing pressure, rather than factoring in M&A risk and earnings at scale. We use Tiffany/LVMH (completed Jan-21) as a case study to see how larger fashion houses can drive operational improvements in standalone businesses (noting recent consolidation e.g. CFR/Vhernier, L Cat./Tods, KER/Creed, KER/ 30% Valentino).
None of this should be surprising, as high inflation and rising interest rates weigh on consumer activity worldwide.
Tyler Durden
Mon, 07/08/2024 – 04:15
