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Political unrest keeps getting in the way of Burberry’s turnaround plans

By Angela Gonzalez-Rodriguez

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Business

First the economic slowdown in China, then Brexit in Europe and now, a new president in the US whose election has sent the main international currencies to frantically fluctuate. Luxury goods house Burberry has seen how major political events have meddled with its turnaround plans, as the British retailer reported a 34 percent fall in first-half pre-tax profits, reflecting costs from its belt-tightening efforts.

Burberry said Wednesday that pre-tax profits declined from 154.7 million pounds to 102 million pounds in the six months to September, 30 after adjusting for items.

Brexit helps Burberry make up for Chinese economic slowdown and erratic post-Trump dollar

Meanwhile other costs also climbed due to the pound's nosedive after the Brexit vote, explained the company in a corporate release. On the upside and excluding the extra charges, adjusted pre-tax profits were slightly ahead of analysts’ expectations, falling by 24 percent to 146 million pounds, reported the ‘Wall Street Journal’. This item strips out exchange rate movements, further highlights ‘MarketWatch’.

Burberry is thought to be one of the clear winners of post-Brexit trading, as it already announced that it benefited from the pound’s weakness, reporting that revenue rose to 1.16 billion pounds in the six months ended September 30, from 1.1 billion pounds in the same period last year.

Commenting on the Earth-shattering outcome of US presidential election, Tom Gadsby from Liberum said the dollar's decline could unmask the difficult underlying trading conditions Burberry faces that have been mitigated by the pound's recent slide.

In fact, Burberry reports in sterling but makes much of its revenue overseas in markets like Asia and the US, meaning sales in those markets look bigger when brought home after the pound's slide, explained market sources by ‘The Financial Times’. Comparable sales in Hong Kong fell by a double-digit percentage, despite Bailey's efforts to attract local customers to offset a slump in Chinese tourism. Overall, the Asia Pacific region reported a low single digit decline in comparable sales. Chief Financial Officer Carol Fairweather on a call with reporters said Burberry has no near-term plans to close stores in Hong Kong, reported Reuters.

In the meanwhile, in the Americas region, Burberry saw comparable sales drop by a low single digit percentage. Burberry has consistently reported in weak sales in the U.S. as department stores have cut back on orders and the British company has shifted its strategy away from pushing wholesale orders as it works to exercise better control over its brand.

In October, Burberry’s chief financial officer Carol Fairweather recognised that "Clearly the US market does remain very challenging," as a sharp drop in sales in the US and Hong Kong hauled Burberry Group PLC's first-half revenue lower, killing the company’s shares momentum and raising the first concerns about Bailey’s early struggles to turn around the British luxury house's fortunes.

In fact, Burberry reported "uneven" demand from shoppers in the US for a string of quarters now, despite the company’s efforts to push the brand upmarket. "We are not intending to allow them to have any inventory to put into their off-priced channels or encouraging them through offering extra discounts, because we want to continue to elevate the brand in the US," said Fairweather when asked about the first outcomes of the company’s new approach to its wholesale channel in US-based department stores.

On the latter, the company hasn’t disclosed any new strategy to turn around its performance in this market, although it confirmed it will continue on its quest to "be very pure in that market." In October, Burberry reported wholesale revenue from channels like department stores plunged 14 percent, which is worse than analysts had expected, including a 25 percent decline in the U.S. wholesale business, reported ‘MarketWatch’.

Donald Trump’s confirmation as the next US president is expected to prompt a slide in the dollar, consequently adding pressure for overseas companies such as Burberry, with significant US businesses (the British luxury brand makes about 20 percent of its revenue from the US market).

It’s worth recalling that, as part of a turnaround plan announced in May, Burberry has been cutting costs and streamlining its product range. Total operating expenses were 6 percent higher in the first half of the year at 56.2 percent of sales, but down 1 percent on an underlying basis.

“In May we outlined plans to evolve how we work as a business and to drive Burberry’s future growth in a rapidly-changing luxury environment,” CEO Christopher Bailey said Wednesday in a news release. “Since then, we have made good early progress towards realising the significant opportunities ahead of us.”

Looking ahead, Burberry said it was on track to deliver 20 million pounds of cost cuts this year, as part of its three-year plan, aimed at saving 100 million pound per year. However, analysts such as Nivindya Sharma from Verdict Retail, stress that the North American market continues to be a “particular bugbear” for Burberry due to the continuing struggle of department stores in the region.

On Wednesday, the company said it's on track to achieve this goal, with savings of 20 million delivered in fiscal 2017. "In May, we outlined plans to evolve how we work as a business and to drive Burberry's future growth in a rapidly-changing luxury environment," said Bailey to analysts. "Since then, we have made good early progress toward realising the significant opportunities ahead of us."

Analysts’ criticism of the company’s leather goods strategy has pushed Burberry to examine its various product categories for revenue growth opportunities and on Wednesday said it is starting to reinvent its bag collection "around a new pillar and shape strategy." In a similar fashion, Burberry said it's also refined a store profiling model to help it better tailor stock to the kinds of customers that visit and is also designing a new customer feedback tool to offer direct insight to its store managers.

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