Burberry Group plc (BRBY) Earnings Call Transcript & Summary

Good morning, and welcome to the Burberry Q1 Trading Update. My name is Elliot, and I'll be coordinating the call today. [Operator Instructions] I'll now hand over to Gerry Murphy, Chair of Burberry to begin. Please go ahead when you're ready.

Good morning, everyone, and thank you for joining us at short notice. I'm Gerry Murphy, Chair of Burberry, and with me is Kate, our CFO; and Lauren, our Head of Investor Relations. As you will have seen, we published our Q1 trading update this morning, and there are slides to accompany this call on the corporate website. We also announced the appointment of Joshua Schulman, Chief Executive and Executive Director replacing Jonathan Akeroyd, who is stepping down, leaving the company in immediate effect by mutual agreement with the Board. Josh will join Burberry on the 17th of July In a couple of days time. I'll talk about Josh's appointment and our near-term priorities in a moment. But first, I'll hand you over to Kate to talk through our performance of Q1 FY '25 and our outlook for the full year. And then we'll take your questions at the end. Thank you. Kate?

Thank you, Gerry, and good morning. As you all know, we are operating against a backdrop of slowing luxury demand with all key regions impacted by macroeconomic uncertainty all contributing to the sector's slowdown. In this context, our Q1 full year '25 comparable store sales fell 21%, and that compares with plus 18% this time last year. As highlighted on Slide 5, all regions declined outside of Japan, with Asia Pacific down 23%, which Mainland China was minus 21%; South Asia Pacific, minus 38%; South Korea, minus 26%; and Japan, plus 6%. Globally, the Chinese customer group declined high teens, but held up better than Mainland China as spend was diverted offshore. Japan continued to grow, benefiting from strong tourism spend, mainly from Chinese and nearshore customers in Asia, while locals remained soft. Americas declined 23%, driven by locals. Globally, the Americas customer group performed broadly in line with the region. EMEIA fell 16% with local spend deteriorating versus last quarter. Tourists accounted for just over half of retail revenues but declined by a high single-digit. Moving to Slide 6 of the deck. This provides a breakdown of our Q1 full year '25 retail sales. The contribution from space was 1%, leading to a 20% decline in retail sales at constant exchange rates to GBP 473 million. Currency was a 2% headwind in the period, with retail revenue coming in at GBP 458 million, down 22% of reported exchange rates. Turning to outlook on Slide 7. The slowdown we experienced in Q1 FY '25 has continued into July. If this trend were to continue through the quarter, we would expect to report a half 1 operating loss and for our full year '25 operating profit to be below current consensus. In light of current trading, we've decided to suspend dividend payments in respect of full year '25 in order to maintain a strong balance sheet and to strengthen our competitive position and underpin long-term growth. To help with modeling in full year '25, we expect retail space to be broadly stable. Wholesale revenue to decline by around 25% in the first half and decline by around 30% in the full year. Capital expenditure will be around GBP 150 million. And currency will be a headwind of around GBP 55 million on revenue and around GBP 20 million on operating profit, all based on foreign exchange rates effective as at the 28th of June. I will now hand back to Gerry.

Thank you, Kate. As you know, we embarked a couple of years ago on a journey to position Burberry as the modern British luxury brand. This ambitious vision has been our North Star. While we are confident that our strategy will deliver sustainable long-term value, our results, particularly recently, have been disappointing. We moved quickly with our creative transition in a luxury market that is proving more challenging than expected. The weakness of the U.S. market, deteriorating consumer confidence in Mainland China and instability in Europe as well as the U.K.'s decline as a shopping destination have all been headwinds to our creative transition. In the context of a weaker global market, as we saw even today from Swatch, we are taking decisive action to rebalance our offer to be more familiar to Burberry's core customers by delivering relevant newness. In terms of brand, we are emphasizing its universal resonance and the ability to forge powerful emotional connections with our current and new customers. In terms of product, we're enhancing our diversified and inclusive offerings with a clear focus on our unique strengths in the market, outerwear in particular. In terms of our customer base, we are maintaining our relevance with fashion-forward customers while nurturing those who seek quality and durability and appreciate the everyday timeless elegance of our British heritage. You will see these changes happening. Some indeed are already underway in our stores, where you can already witness how we are blending our heritage with novelty and expanding our assortment to reestablish Burberry's universal positioning. In our upcoming outerwear campaign set to roll out in October, we will celebrate our heritage and tradition; on our website, where we will be revitalizing our storytelling over the coming weeks. And we expect these actions we are taking to start to deliver an improvement in our second half and to strengthen our competitive position and underpin long-term growth. Significantly, we've appointed Josh Schulman as our new CEO to lead this next phase. He replaces Jonathan Akeroyd who is stepping down by mutual agreement with the Board. Josh is a proven leader with an outstanding record of building global luxury brands and driving profitable growth. He has a strong understanding of our brand and shares our ambition to build on Burberry's unique creative heritage. We're grateful to Jonathan for the contribution he has made to Burberry. Jonathan set out a clear strategy for growth in modern British luxury that we will build on. We're confident our strategy will deliver sustainable long-term value. Our brand remains very strong, our core categories are very resilient with their unique British heritage. I'm confident that we will achieve our ambitions under Josh's leadership. Now Kate and I will take your questions.

[Operator Instructions] Our first question comes from Antoine Belge with BNP Paribas.

It's Antoine at BNP. Three questions, if I may. First of all, regarding the appointment of Josh. Can you first of all confirm that he was unemployed since leaving Capri in March 2022? And also, his main CEO experience was in affordable luxury brand rather than luxury brands? So does it signal maybe a change of strategic positioning, maybe a bit away from brand elevation and maybe coming back to a bit more of an affordable luxury positioning? My second question relates to this possibility that H1 could be loss-making. Is it possible to have a bit of an underlying assumption in terms of gross margin, how much could it decline? And also the OpEx growth, and if there would be any exceptional in that OpEx space? And finally, regarding the new wholesale guidance for the second half. Where is the deterioration coming from? I think when you outlined the H1 guidance, you gave sort of 3 buckets. Maybe that could be helpful to have a similar breakdown between your own initiatives and what is more driven by the market.

Thank you, Antoine. Let me deal with the questions about Josh first, and then Kate will take the questions on the numbers. John's last major executive role was indeed at Coach, which as you know, is a very successful global brand. But before Coach, Josh's experience in luxury includes a very successful stint at Jimmy Choo based here in the U.K., a very successful period as CEO of Bergdorf Goodman. And prior to which, he worked with Kering at Yves Saint Laurent. So Josh's experience, frankly, or most of his career actually, is in luxury. The strategy for Burberry has been, since Marco Gobbetti's time, has been very much about positioning Burberry as a true luxury brand. And for the avoidance of doubt, that will not change. Jonathan Akeroyd coined the concept, as I said, modern British luxury. Again, very much reflecting our ambition to position Burberry as a unique British luxury brand proposition. And that is very much Josh's intention when he joins, in fact, later this week. So you should not assume that there will be any major shift in strategy. As we said in the statement and the release, the focus is very much on rebalancing our offer to be more familiar to Burberry's traditional clientele based on a greater representation in the assortment of classic, timeless pieces, but with a topspin of novelty and newness provided by Daniel Lee for the runway customers and for more fashion-forward customers. So we're trying to be a universal brand. There's a recognition, I guess, in the statement that we do need to reposition, I guess, back to our core, to some extent. But it's an adjustment, not a reversal of strategy. I want to be very clear about that. On the numbers, Kate.

So if I firstly take your question on half 1. We're not going to guide to a specific number this morning, but let me just help give you some pointers in terms of the key building blocks there. So on revenue, we've obviously reported that Q1 will be down 21%. And we actually exited the quarter slightly worse than that. And we indicated, obviously you can see in the statement, that wholesale will decline by around 25% in the first half. I'll come on to a bit more detail on that in a moment as per your third question. On the margin, as you will remember, historically, we do tend to see a lower gross margin in first half versus second half, and this is predominantly due to seasonality. You'll remember the H2 FY '24 gross margin was 65.8%, and I think you're going to see some of the headwinds that you saw in the second half continuing. So those would be investment, obviously, in the supply chain that we've previously talked about. And then of course there potentially could be some inventory provisions given where we're trading, but I'll give you more detail on that at the H1 stage. So I think if you consider all of this, and of course, you've got some FX headwinds in the first half. So that will be about minus 50%. I guess the final piece to mention there would be OpEx. We typically tend to experience, it's normally mid-single-digits inflation, on the fixed element of the cost base, our fixed cost base being around 80%. As you can imagine, we're really reviewing the cost base very carefully given the trading environment. But most of the cost actions that we are now taking will come through in the second half. So I'd expect, second half, the cost actions will offset the impact of inflation. But you will still see a bit of inflation in the first half. And then I think the final piece is that, as ever, there will be a number of accounting adjustments to consider at the half year. And yet to see whether that will be an additional headwind. Then just on your wholesale question. As per the statement, we expect wholesale to decline by 25% in the first half and about 30% in the full year. And I'll just remind you the main moving parts in that, and we talked about some of this back in May. So we actively have taken the decision to reduce our exposure to some accounts, mostly in EMEIA. As you know, we pretty good position in wholesale in the other regions. So that's very much increasing our control of distribution. We have also accelerated the conversion of some of our wholesale accounts to retail. That's mostly in the U.S. And then, of course, as we flagged this morning, the external environment does remain very tough, and wholesale has been impacted by this. But as ever, we're working closely with our partners to reduce any risk of overstocking.

We now turn to Thomas Chauvet with Citi.

Apologies for the background noise, I was caught up a bit by surprise this morning. A couple of questions, please. The first one on the slight change perhaps in brand strategy and positioning. You're talking about reinforcing Burberry's classic positioning. Does that mean that you don't necessarily need a dedicated creative director? And can you let us know what the duration of Daniel Lee's contract is? I think he joined in the autumn of '22, so about 2 years ago. . And secondly, Kate, you had already indicated back in May you'll try to offset underlying cost inflation with some cost initiatives. Are you reevaluating the magnitude of cost-cutting action needed in light of recent trends? And could you elaborate a little bit on what these cost actions are?

I'll take the questions about Daniel, Thomas. And Kate will pick up on the numbers again. Look, we believe, as does market generally, that Daniel Lee is a rare creative talent. We were very excited when he joined and remain so. There is no plans to change our creative leadership. Josh is looking forward to working with Daniel. He's already spoken to him, and they will meet this week. So no, you should not assume any change in creative leadership at this stage.

And then just on the costs. I mean, I'll just start by saying we will absolutely prioritize investment in consumer-facing areas. But as you would expect, we're balancing this with very disciplined cost control. Key opportunities being in areas, such as procurement, travel, improving operating efficiencies. We are though even more focused on cost savings in the second half. And as per my comments just now, I think we're pretty confident that the cost initiatives that we are taking will enable us to impact -- to offset the impact of inflation in the second half, which does require some fairly good cost savings given the size of our cost base.

We now turn to Louise Singlehurst with Goldman Sachs.

Just a couple for me, please. If I could just go back on to this point on the product. And obviously, we've all been asking about this, but the everyday luxury offer and just what that actually means. It seems very sensible to be focusing on the outerwear. And obviously, you talked about the marketing coming in from October. But does this mean a much more kind of casual wear offer? Is this something that Daniel Lee is fully committed to and would be overseeing the whole collection as well and just the timing around that everyday luxury offer? And then my question -- second question is just a follow-up on the whole, that the messaging here this morning is obviously one of not much change. But there is quite a lot of change if we look underneath the hood in terms of product and thinking about where the brand potentially is going to go. But is this more of a holding pattern until we hear from, obviously, Josh when he comes in, in November? Is it are we waiting now for a step 2 in terms of the strategy update, I presume yes, with the new head at the helm?

Thank you, Louise. No, you shouldn't assume a significant change of overall direction. Josh has been very engaged and thinking about Burberry for a number of years and has a very clear view of where he wants to take the brand is, very consistent with what Jonathan was trying to do. We recognize that, in a difficult macro environment, a creative transition has proven difficult. And we recognize, as Jonathan said, that once we went live with Daniel's collections, we needed to trim and adjust to, I guess, to favor and to emphasize more of the timeless classics in the collection. And we also want to make sure that Burberry is a genuinely inclusive brand, and we've got a good offering through the price points from sort of entry-level luxury to higher price points for customers who want something different and novel. So it's about -- it's more democratizing Burberry, but within a genuine luxury context than it is about what people commonly refer to as premium or affordable luxury. That is not the strategy. You will hear -- sorry, as you've posed the question. You will hear from Josh more fully at the half year stage when he's been in the business for a few months. But you should not expect radical change. That's not the agenda here.

And can I just confirm that Daniel will be looking over the whole collection? Just to -- there's no changes there.

Josh and Daniel will work out their modus operandi. As I said, they've already spoken. Daniel is excited about Josh joining. We spoke about it last night and they'll meet this week. Effectively, Daniel will concentrate on runway and on innovation. And he and our sort of commercial product team will craft the sort of mainstream assortment, but Daniel will be involved as creative director in all aspects of our creative proposition.

We now turn to Chiara Battistini with JPMorgan.

Did you have questions, Louise, on -- go ahead.

Just a couple, please, for me, as well. Following on just you commented about democratizing, but still maintaining a luxury positioning. And I guess it's too early to talk about views on pricing strategy from here, is that right? And also from a store network perspective, maybe any early views on how maybe the store network could evolve going forward, including outlets. And the second question, shorter term actually, on the Q1 trading update on Europe. Versus my expectation, Europe definitely took a step down. So could you maybe comment on that and give us more color between domestic and tourists, please, on European performance?

Kate, do you want to take the numbers question?

Yes, sure. So just to give you a little bit more detail on Europe. So you could see, in total, we saw a 16% decline with an exit rate a little bit worse than that. I mean certainly, locals did continue to decline in the quarter, down certainly worse than what you would have seen [ before ]. Tourists were about half the retail revenues, and they declined as a group, kind of I would say high single-digit percentage. Tourists were about 55% in the quarter, so that is lower certainly than what we would have seen pre-pandemic. And Chinese customers are around, I think, 19%, 20% of the mix. But again, still well below what we would have seen pre-pandemic. And I think if just take the one on the store network as well. We are reiterating the guidance that we gave at the full year in terms of CapEx, GBP 150 million. Clearly, the store network, we have a very strong distribution footprint, and investing here is absolutely key to long-term growth. So no change to this strategy at that stage.

And on the other question, Chiara. By democratizing, I meant ensuring that Burberry is an inclusive brand, customers can find product that they regard as timeless and familiar from Burberry at prices that are also kind of familiar and predictable. But offering a full range through the -- across categories and through price points. I think we certainly want to rebalance the assortment from where it is now to be more inclusive. There's a recognition, I think, in the actions we're taking that we needed to course-correct a bit in a tough market, and we're doing that.

Our next question comes from Rogerio Fujimori with Stifel.

I have a question about leather goods. I appreciate your comment on no radical change in strategy. I think Jonathan's strategy was really centered in leather goods and moving the average selling price points higher with a more exclusive offer, with price points compared to, say, Prada or Gucci. So what are the implications for -- from his departure on your leather good strategy? And if it -- from what I understand, rebalancing the mix towards lower price points impacts, perhaps of more novelties in the GBP 1,000, GBP 1,500 price point?

Thank you, Rogerio, for the question. This is about rebalancing, not about radical change. It's about ensuring that we have the right product mix through price points, but we will continue to make available higher-priced, more elevated product to those customers who want that, but ensuring that we have better availability through the range. But from a luxury starting point, that is very much the intention.

We now turn to Zuzanna Pusz with UBS.

So just two for me. Maybe first of all on the strategy, because I'm not sure I fully understand why then the CEO change. Because I think the message so far is that you're not really reversing the strategy, you're just adjusting it, and you don't seem to be planning to go away from sort of brand elevation. So what really is the change? And then why it couldn't be really implemented under Jonathan Akeroyd? Just so that we understand maybe fully what's happening. Because with the CEO change, it looked initially like it would be a reversal in the strategy. But I guess from what you said so far, it feels like there is not much change, Daniel Lee is still going to be in charge, you still want to elevate the brand. So just to maybe understand what's the new CEO bringing that Jonathan really couldn't bring to the table? And secondly, maybe on your outlet exposure. I remember on the previous calls we had when Marco Gobbetti left, you were mentioning that the business is much better quality than it was in the past, which I guess makes sense on the wholesale level. But it does seem actually your outlet exposure has been increasing over the years. So is this something that you plan to change? I mean, it is quite important and luxury, and I think customers do look at it, if brand has a big outlet exposure, it is not necessarily recognized as being so, I would say, high end. So any update on the outlet exposure? And what the new CEO change may involve would be very helpful.

Thank you, Zuzanna. Look, on the CEO question. Jonathan is, as you know, one of the most highly respected figures in the fashion industry, and frankly, one of the most popular, both inside the business and externally. But sometimes, things don't work as planned and we need to make a change. And that's what we agreed with him, and that's why we're appointing Josh as CEO for this next phase. That happens, and it's happened in this case. And we are sad to see Jonathan go, but we're also excited that Josh is joining. And I really have no more to say about it than that. On the outlet question. Over time, we do want to bring down the outlet penetration. In a period of where trading is challenging, it is frankly very useful to have an outlet channel to manage our inventory in a way that is controlled and accretive to the brand. And over time, pretty much as Marco outlined some time ago, the strategy is to reduce our outlet penetration.

And just a follow-up on the outlets. Can you maybe share with us any color around what percentage of your profits are outlets? Because I understand, obviously, things have been challenging. But given that my understanding is that you still produce quite a bit of product made for outlet, I guess that's a key component because it is not used just to clear excess inventory, it is a separate business on its own. So is this something that is going to change? Or is it going to stay the way it is?

So I'm afraid, as you know, we don't disclose our exposure to outlets. I mean, I think just to reiterate what Gerry said, we will -- our ambition is to reduce our outlet exposure, but it is an important part of our product life cycle.

Yes. Zuzanna, we don't regard outlets as a separate business. Their prime purpose is to manage our inventory as part of the product life cycle. And obviously, we have to complement the excess inventory with some major outlet products so that we have a compelling offer to customers when they come to the stores. But we don't see it as a separate business, and we're not trying to develop it as a separate business.

[Operator Instructions] We now turn to Luca Solca with Bernstein.

Yes. I have a couple of questions. I wonder, as the brand is in transition and as you've been forced to discount quite a significant amount of your inventory, how you go about assessing potential brand equity damage from that excess inventory going into the market? And what kind of lead time it would take to sort of adjust and correct the consumer perception of the Burberry brand now that it is discounted heavily in the market? The second question is about making sure I understand perfectly well what rebalancing means. The way I understood it so far is that rebalancing means opening more entry price points to make sure that the brand remains inclusive and that you have the broader audience that Burberry should command. And therefore, this means an adjustment relative to just moving the brand higher. So higher, okay, you will retain that. But you will also make sure that you have entry price to satisfy consumers in the aspirational middle-class segment. I wonder if this is a correct understanding of what you're trying to do. I'm just saying this to confirm or not confirm that this is. And then if you could elaborate on what came short in -- other than performance and results, clearly. But what came short in terms of how implementation of the strategy was carried out? And what are the most important elements that Josh should be correcting?

Okay. Thank you for your questions. I think you've summarized it pretty well in terms of ensuring that we have a product that is timeless and familiar to customers available through the price points, from entry level through to more elevated, more novel product with more innovative design content, rather than shifting everything upwards. So I think elevation means different things to different people. It's a vague enough term. It does not mean selling absolutely everything at a higher price point than last year. It means having product available to customers who are willing to pay more for product at -- with different characteristics. But it is very much about making sure that we do have product available for our customers who want to buy familiar propositions from Burberry. The question on brand equity. We will manage the inventory consequences of our weak trading over the next 2 or 3 seasons as we would do normally through our outlets and in a controlled way. And we don't think there's any lasting brand damage as such.

What about...

Sorry, Luca. Did you have a follow-up question?

Yes. I was just wondering, what are the most important elements that came short in terms of implementing the strategy during the previous tenure of Jonathan? And what should Josh be correcting? If you could potentially share the 2 or 3 most important priorities for him to act on.

Yes. I think Jonathan himself in May signaled a rebalancing back towards the core, back towards timeless product, back towards marketing propositions and aesthetic that is more inclusive and more familiar to customers. So it's very much executing, the actions are already in place, and getting those done as quickly as possible to rebase the core of the business. So there's nothing novel in the agenda going forward. It is about executing what's already in place.

We now turn to Erwan Rambourg with HSBC.

Well done on getting Josh on board. Maybe just two follow-ups. The macro is hurting everyone in luxury. I'm just wondering what you could have done differently, what was under your control, that in hindsight, you could have done differently over the past 2 years? And then secondly, I think you've lost a lot of regional heads, the Chief Commercial Officer, the Head of the U.S., the Head of Europe, 1 or 2 clusters in Asia. Have you replaced these people? Or are you still in between? And can you benefit from Josh's contacts to make hires at a later stage?

Thank you, Erwan. On the hindsight question, Yes. The market, as I said in the statement, has been weaker than we expected and probably weaker than even you expected in key markets for us, like China and North America. And in effect, our European market is mainly about tourism, which frankly is mainly our Chinese and Americans for the most part. So it's been a tougher market where customers are more cautious, more conservative, not just about price, but on style. And I think we, with the benefit of hindsight, perhaps moved a bit too far too fast with a new aesthetic in a market that was weakening and where customers basically favor familiarity. So essentially, the corrective actions we're taking, I think, answer the question that you posed, and they set out the agenda near term as well for Josh, which is really all about executing what's already in place at pace. On colleagues. Yes, we have indeed lost a few colleagues to other opportunities. The recruitment of those is well in hand. Josh will obviously make his own view. The processes are at different stages of completion, some are very near completion, others will take a little longer. But he will want to make his own of that. In the meantime, the team is well established and very capable, and I don't think we will miss a beat.

This concludes our Q&A session for today. I will hand now back over to Gerry for any closing remarks.

Well, I just want to say thank you again for joining us at very short notice. And we look forward to seeing you all for our interim's update in November. So thanks, everybody.

This now concludes today's conference call. Thank you all for attending. You may now disconnect your lines. Goodbye.