Profits up for Burberry as it aims to ‘unlock’ Japan

Against a difficult backdrop in many of its markets, luxury goods outfit Burberry (LSE: BRBY) today reported adjusted pre-tax profits of £461m in its full-year results. That’s an 8% increase on last year’s £428m. Total revenues grew by 17% to £2.3bn.

Burberry hit the news last autumn when it announced that its CEO, Angela Ahrendts, had been poached by Apple. Earlier this month, Ahrendts finally departed, so today’s full-year results are perhaps a final report on her tenure at Burberry.

Asia – and China in particular – is a critical market

Emerging markets, and those in Asia in particular, are seen as crucial for growth in the luxury goods sector. And yet, as Merryn Somerset Webb has written, the sector faces significant challenges.

High-profile corruption cases in China have focused the public’s attention on some Communist party members’ expensive tastes. And it’s not just the rich and powerful that have shaken the market. Ordinary citizens have felt the pinch owing to China’s slowing economy.

And yet, Burberry still sees China as critical to its success. Last year, it opened 18 new stores and concessions on the mainland, and plans to open between five and ten in 2015.

New boss focusing on Japan

China is far from being the only Asian market Burberry is interested in. In the months ahead, it has set its sights on “unlocking Japan”, as new boss, Christopher Bailey, put it.

Expiring licences there have allowed Burberry to take direct control of its operations in the world’s second-largest luxury goods market. It currently has four stores and ten concessions in Japan, with more to follow.

Tapping in to a younger clientele

Burberry has also taken its beauty products business in-house. With fragrances such as Brit Rhythm, it has gone after a younger, teenage market, which it sees as being a major growth area. It forecasts revenues rising by 25% next year.

And that underscores another important point. With a younger clientele, Burberry is all too aware of the devastation the internet has wrought on traditional retail.

As a result, Burberry has decided to get with the trend by bringing technology into its shops, so now customers can place orders using iPads in-store. It has also formed partnerships with Amazon, Apple and Google – and has made effective use of social media.

But regardless of technology changes, China is still crucial for Burberry’s future. Many pundits fear a slowdown in China soon and that’s why MoneyWeek editor John Stepek was cautious on the whole sector back in September 2012.

Today, investors have been largely unmoved by Burberry’s profit announcement. The shares rose 1.7% in the morning, but have since fallen back to around £15.17. That puts them on a price/earnings (p/e) ratio of around 26. So, not cheap then.

Merryn

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