(Bloomberg Opinion) -- Burberry Group Plc’s last catwalk show in September, where models strutted in front of giant space-age speakers, was called Evolution.
That’s just what the group delivered on Thursday. Sales held up despite the ongoing disruption in Hong Kong. And Burberry maintained its guidance for the current financial year for broadly stable sales and operating margin.
That’s a relief for shareholders who had feared the turmoil would derail Burberry’s nascent turnaround under new designer Riccardo Tisci. The shares rose as much as 9%.
That reaction looks overdone.
Hong Kong is having an impact on Burberry. First-half sales there declined by a percentage in the double digits. The group estimated that the region now accounts for about 5% of total sales, compared with 8% previously.
There will also be an impact on the gross margin — the difference between the price that retailers buy and sell their stock. The group had expected this to decline by 1 percentage point as it invested in product quality and cleared items that were designed before Tisci’s arrival. The turmoil in Hong Kong, which has hit tourist spending and forced Burberry to temporarily close stores, will mean that gross margins decline by 1.5 percentage points.
However, this should be offset by factors including cost savings, with the company forecasting efficiencies of 120 million pounds ($154 million) by the end of this financial year.
Burberry says it’s factoring an ongoing decline in Hong Kong into its expectations. But the violence there appears to be escalating. That doesn’t bode well for the coming months, and particularly the run up to the crucial Chinese New Year period. And let’s not forget the risks to Chinese demand from simmering trade tensions and worries about a U.S. recession next year.
Tisci’s designs do appear to be gaining traction. Same store sales rose by 4% in the first quarter, but this accelerated to 5% in the three months to Sept. 28, commendable given the situation in Hong Kong. The company’s hoping to generate more demand for its fashions in China by teaming up with internet giant Tencent Holdings Ltd. to experiment with creating new stores that connect consumers online lives to their physical retail experience.
As well as finding favor with young Chinese shoppers, Burberry says its new styles, particularly menswear, are appealing to domestic U.K. customers. That’s crucial in developing a broad-based recovery.
But sales of accessories fell 5% excluding currency movements in the first half. Burberry blamed that on a lack of demand for the old styles, with a vast improvement in the appetite for Tisci’s designs.
Yet bags is a key area where Burberry must win, and it’s seems increasingly clear that reviving this category will take time.
What’s more, as I have noted, while Tisci’s designs are adorning celebrities, there doesn’t seem to be the buzz around Burberry as in the early stages of Gucci’s turnaround. The Italian designer’s new products represent about 70% of the range in stores now. That will increase to 80% by the end of March, which will provide a better read of his success.
Before Thursday’s update, Burberry shares had sold off since July, although they recovered over the past month, as rival luxury groups posted resilient third-quarter sales.
Still on a price-to-earnings basis, they trade at about 23 times, compared with about 24 times for the Bloomberg Intelligence luxury peer group.
Until the group demonstrates that Tisci can deliver a revolution at the British luxury brand, that discount looks deserved.
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Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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