Burberry's decision to take direct control of its fragrance and beauty products, as announced October 11th could be a long-term driver of profits, according to figures reported by Reuters.
Fragrance and beauty will be run as Burberry's fifth product division alongside accessories and womens, mens and childrens apparel.
The decision to end its existing licence agreement with Interparfums and run fragrance and beauty directly from April 1st 2013 will cost the company €181m to end the relationship, but longer term should be earnings accretive.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Citi estimates the perfumes move could dilute earning by about 3-5% in 2013 and 2014, but says that if Burberry is able to achieve best-in-class operating margins of 20% in fragrances then it would largely offset the start-up costs.
Burberry is following an industry-wide trend of buying back licenses to gain more control over brands. Last year it completed the purchase of its menswear licence and took steps to reduce the number of licence agreements it has in Japan.
CM
-
Cash in on the growth prospects of Europe's companiesOpinion Marcel Stötzel, co-portfolio manager of the Fidelity European Trust, selects three stocks
-
Is the AI boom another dotcom bubble?25 years on from the dotcom bubble bursting, is it time for investors to consider the sustainability of the AI boom in the stock market?
