Burberry reveals turnaround plan – should you invest in luxury stocks?

Luxury fashion house Burberry announced its first-half results this morning, unveiling a new business strategy alongside some challenging numbers. The company announced a pre-tax loss of £80 million in the first half. Revenues were also down 22% compared to the same period a year ago.

Some analysts were expecting the figures to be worse, and investors have responded positively so far to the new business strategy announced by chief executive Joshua Schulman. Burberry’s share price is up more than 20% today, at the time of writing. The year-to-date share price loss has narrowed slightly to around 37%.

“Our recent underperformance has stemmed from several factors, including inconsistent brand execution and a lack of focus on our core outerwear category and our core customer segments,” Schulman said. “Now, we have a clear framework to reignite brand desire, improve our performance and drive long-term value creation.”

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The company says it is confident it can get back to generating £3 billion in annual revenue over time, while rebuilding margins and driving strong cash generation. It said it was too early to determine whether its results in the second half would offset the losses from the first half, though.

The strategy announcement comes after rumours of a Moncler takeover circulated earlier this month. Around 18 months of share price losses have made Burberry vulnerable to a takeover attempt. The company dropped out of the FTSE 100 earlier this year after 15 years in the index. In July, Burberry also announced it would be suspending its dividend in anticipation of reporting an operating loss in the first half.

Richard Hunter, head of markets at investment platform Interactive Investor, says that “much of the sting from [today’s] numbers was taken at the time of the group’s shock announcement in July”. He adds that the new strategy is “unlikely to result in overnight success”, but acknowledges that “the group’s aspirations have been clearly stated”.

Can Burberry weather the storm?

Burberry might be famous for its iconic rain coats, but the luxury retailer has struggled to weather the storm of a cost-of-living crisis and weak consumer demand in China. Burberry’s sales were down across all regions in the first half, it revealed today, with Asia Pacific reporting the biggest drop (25%).

Although inflation has now slowed significantly, interest rates remain high and consumers are being cautious. In environments like these, luxury items are often the first things to go. The Amundi S&P Global Luxury ETF, which has exposure to around 80 major luxury stocks worldwide, is down 3.32% year-to-date.

“Burberry's long share price slump is down to three things,” says Russ Mould, investment director at platform AJ Bell. Firstly, the sector as a whole has inflicted pain on itself by pushing prices higher, pricing aspirational buyers out. Secondly, investors have pushed valuations to “lofty” levels as they “overpaid and mistook reliability for safety”. On top of this, Burberry has made some “company-specific strategic errors on range and positioning”.

Mould adds: “The good news now is expectations are lower and Joshua Shulman is already addressing the issues of range positioning and segmentation and pricing. Inventory needs to be reeled in and there is much work to be done. But any sign of a self-help programme that maximises the value of the heritage check brand, and some sort of tailwind from the broader luxury market and China in particular, and the shares could start to at least find a floor.”

Should you invest in luxury stocks?

Several of the challenges suffered by Burberry are not unique, but are impacting the luxury goods sector at large. The Chinese economy has been a particular headwind, as the property market crisis that began in 2021 continues to bite.

“China had been the powerhouse for global luxury brand sales but with the property market so fragile, it’s been affecting wealth perceptions and a willingness to spend big among the middle classes in particular,” says Susannah Streeter, head of money and markets at Hargreaves Lansdown.

Consumers in other markets are cutting back too, though. Research from wealth management firm Saltus shows that 17% of UK high net worth individuals have cut down on luxury items and designer clothes specifically.

In China, Streeter says sentiment has improved somewhat recently after the “boots and braces package unveiled by Chinese authorities”. However, she adds that “further stimulus will be needed, including significant tax tinkering to put more money into consumers’ pockets, to boost the chances of a more sustained recovery”.

Meanwhile, in economies like the UK, Eurozone and the US, falling interest rates could ease pressure on the luxury goods sector, if consumers start to feel like they have more money left over after paying for the essentials.

In recent months, both the US Federal Reserve and the European Central Bank have cut interest rates by 75 basis points from their peak. Meanwhile, the Bank of England has delivered 50 basis points in cuts so far in total.

But the outlook is still far from certain, particularly given the fragile geopolitical backdrop. Experts have warned that the tariffs threatened by Trump could push inflation up, if they come to fruition. Further escalation in the Middle East could also prove inflationary.

Investors will be watching these developments closely when assessing the outlook for the luxury goods sector.