Burberry's profits nosedive as luxury slowdown continues

No one was expecting major revenue and profit progress at Burberry (BRBY) this year. By now, the ongoing difficulties in the global luxury retail market are well documented (and priced into company valuations). Investors were, however, probably hoping the management team would strike a cautiously optimistic tone in the group’s annual results – and it did not. 

In place of formal guidance for the year ending March 2025, the company said only that “in the context of a still uncertain external environment, we expect [the first half] to remain challenging”. Wholesale revenue is expected to fall by around 25 per cent in the first six months of the financial year as the group increases its control of distribution.

Given that wholesale tends to be Burberry’s most profitable channel, analysts at UBS predicted that “the outlook for FY2025 could be weaker, at least in H1”. From a regional perspective, the Americas presented the largest obstacle to growth in the group’s last financial year. Comparable store sales in this region fell 12 per cent, with management acknowledging that it’s continuing to see broad-based declines among local consumers.

Sales in Europe, the Middle East and Africa rose by 4 per cent, but fell 3 per cent in the fourth quarter as tourist spending was outweighed by cost-conscious locals. The story was much the same in Asia-Pacific, although revenue was down by a more concerning 17 per cent in the final three months of FY2024.

At the year-end, net debt to adjusted Ebitda was 1.4 times – well above the company’s target range of 0.5 to 1.0 times. Just a year ago, leverage sat at 0.5 times, but lower profitability, working capital outflows and a share buyback scheme has pushed the metric up. 

While the shares look cheap at less than 15 times consensus forward earnings for 2025, it’s clear that they could fall further if the first half underwhelms. Hold.

Last IC view: Hold, 1,600p, 16 November 2023