Burberry reassures on LFL sales and margin

Things are not as bad as feared at luxury fashion chain Burberry, which still saw some like-for-like sales growth in the second quarter of its financial year despite warning last month of a material slow-down in its retail business.

Things are not as bad as feared at luxury fashion chain Burberry, which still saw some like-for-like sales growth in the second quarter of its financial year despite warning last month of a material slow-down in its retail business.

"Against record prior year comparatives, Burberry delivered 8% total revenue growth and 10% retail growth in the first half, albeit slowing in the second quarter. In a more challenging external environment, footfall declined but brand momentum remained strong, particularly with our higher spending luxury consumer," said Angela Ahrendts, Burberry's Chief Executive Officer.

Late pick-up in LFL salesIn the six months to the end of September, total revenue for the group was £883m, with retail revenue of £577m and wholesale revenue up 5% on an underlying (constant exchange rates) basis to £253m. Licensing revenue was down 5% on an underlying basis to £53m.

On the retail side, like-for-like (LFL) sales in the first half of the group's financial year were up 3% year-on-year, with LFL growth slowing to 1% in the second quarter from 6% in the first quarter.

The slow-down in LFL sales growth is obviously not desirable but was better than some market observers were expecting. Seymour Pierce, for instance, had been forecasting a 2% decline in LFL sales in the second quarter. The broker was wrong-footed by an improvement in LFL sales growth towards the end of the second quarter.

Good news on the operating marginThe Retail/wholesale operating margin in the six months to September 30th 2012 is now expected to be at least in line with the same period last year (14.9%), rather than lower as previously guided. This reflects the quality of the revenue performance and tight control of discretionary spend, the group said.

Asia Pacific overtook Europe in the reporting period as the big money earning for Burberry's retail and wholesale businesses.

Retail/wholesale revenue in Asia Pacific rose an underlying 8% year-on-year to £299m from £266m the year before, while revenue in Europe climbed an underlying 8% to £272m from £271m a year earlier.

The Americas saw underlying revenue improve 5% to £203m from £190m, while the rest of the world chipped in with £56m of sales, up 14% from last year's £49m contribution.

For the second half of the financial year, average retail selling space is on plan to increase by about 14%. On the wholesale side, Burberry expects underlying wholesale revenue in the second half will be similar to last year's level of £230m, reflecting the rationalisation of certain opening price point products in core accessories and outerwear.

"With a more cautious approach from customers globally, the United States, Asia Travel Retail and Emerging Markets are expected to continue to grow, offset by further contraction of small speciality wholesale accounts, especially in Southern Europe," the group revealed.

With timing benefits in the second half, Burberry continues to expect licensing revenue for the full year at constant and reported exchange rates to be broadly unchanged year-on-year.

Fragrance and beauty to be brought in houseHaving recently announced its intention to end its existing licensing relatiionship with French firm Interparfums Burberry announced that its fragrance and beauty product categories will now be run in-house, forming a fifth product division for the group alongside accessories and women's, men's and children's apparel.

This should not be too much of a leap for the company as it already leads all product design, packaging and marketing activities for fragrance and beauty; it will now take on the less sexy side of the business, such as sourcing, logistics and keeping distribution partners sweet.

To facilitate the transition, the licence relationship with Interparfums has been extended until March 31st 2013. Burberry will commence direct operations from April 1st 2013.

"Directly operating fragrance and beauty is in line with our strategy of taking greater control over our brand," Ahrendts revealed.

"There are significant opportunities to accelerate the growth of this business over time, leveraging our infrastructure and that of existing key suppliers and distributors," she added.

Close those short positions ...News of the late September pick-up in LFL sales and the better than expected news on the margin front saw doubters pile back into the fallen glamour stock, with the shares up 63p to 1,066p in the first hour of trading.

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