Burberry Group plc (BRBY) Earnings Call Transcript & Summary

[Audio Gap] Performance of our silk scarves. At the same time, we're extending our product authority into ready-to-wear and women's bags. Overall, and for the first time in 3 years, we saw growth across our womenswear, menswear, accessories and children's wear divisions. We're seeing a positive customer response to our product and pricing strategy. We are successfully offering value for money in a luxury context across each category with good, better, best pricing tiers. This is supporting our quality of sales through growth in full price and lower markdown year-on-year. We grew our customer base in the quarter with Gen Z customers up double digit for the group. We continue to improve store productivity through clienteling and cross-merchandising supported by the rollout of category destinations, including 97 Polo galleries launched by Father's Day. E-commerce showed good growth, up mid-teens in the quarter. And finally, we have increased half 1 FY '27 wholesale guidance, reflecting the positive response from our partners. Moving on to the quarter's retail performance. As mentioned, comparable retail sales grew 5% in the quarter. The contribution from space was a 1% headwind, resulting in retail sales growth of 4% at constant exchange rates. Currency represented a 1% tailwind with retail revenue landing at GBP 455 million, up 5% at reported exchange rates. Turning now to regional performance. Americas delivered the strongest performance in the quarter with comparable retail sales growth of 12%. This was supported by local spend and broad-based customer acquisition. Mother's Day was particularly successful for us in Americas, driving customer engagement and growth in our bags business. Greater China grew 9%, supported by local spend and particularly good growth in Gen Z customers. While the operating environment in China remains mixed, our actions are driving outperformance. Asia Pacific grew 3% in the quarter. South Korea continued to perform strongly, growing 11% on a more challenging comparative base with growth supported by both local demand and tourist spend. Meanwhile, Japan declined 2% and impacted by continued weakness in inbound tourism from Chinese visitors. EMEA declined 3%, reflecting the ongoing impact of the Middle East conflict and lower tourist spending. Tourism in Europe was impacted by the Middle East conflict. However, despite that, we've seen good trends from American visitors and encouraging full price sales. Excluding the Middle East, the region declined by 1%. Turning now to our strategic progress across brand, product and distribution. On brand marketing investment is sustaining brand momentum and supporting sales. Our port traits of an icon campaign brought new customers to our brand with a 19% increase in new rainwear customers. Our high summer campaign featuring the Hansa G swimwear collaboration supported a doubling of swimwear sales in the quarter and a good spot supported growth in house check bags and polos. In addition to global campaigns, we have continued to celebrate relevant local content with the launch of the first installment of a 3-part short documentary series created in partnership with Chinese national geography. The series showcases brand ambassador, Chen Kun exploring China's natural landscapes in Burberry Signature outerwear. And to complement our high-summer campaign and swimmer collection we extended our brand codes through hotel takeovers in Ante, Bangkok and Athens. In product, we continue to build on our authority in the categories where Burberry has the greatest authenticity. Outerwear grew double digit during the quarter, supported by strong demand for heritage and trans seasonal products, including summer weight outerwear such as our tropical gabardine range and our short Mayfair trench. We've also been encouraged by the performance of silk scarves in these warmer months. We're extending our momentum across product categories outside of our hero categories with particularly strong performance in knitwear, Polos and swimwear in this quarter. And we're seeing good performance in women's bags overall driven by growth across several families, including the Cotswolds, the House Check and Horseshoe. In distribution, we continue to make choiceful adjustments to our store network, including investing in a new location on Via Montenapoleone in Milan which is set to open in FY '28. The rollout of our category destinations remains on track, supporting store productivity and cross-category merchandising opportunities. We launched 97 Polo galleries by Father's Day, and we'll launch trench destinations and cash measures in the second half of the year. Finally, we continued the rollout of a client-telling tool. This tool enables a more intuitive and user-friendly experience for our client advisers while also allowing improved planning and productivity in store and a more engaging customer experience at scale. Turning now to the outlook. As we look ahead, we are encouraged by the progress of Burberry forward, and we'll build on it to drive performance and deliver sustainable long-term value. In the full year, we expect to make further progress on our financial ambitions, including delivering revenue growth and margin expansion in line with expectations. We remain mindful of the uncertain geopolitical and macroeconomic environment and its potential impact on consumer confidence. To help you with modeling, in FY '27, retail space is expected to be broadly stable. As I noted at the start of the call, wholesale revenue is expected to grow by a high single-digit percentage in the first half of FY '27. And an increase from the mid-single digit expected at the start of the year. Annualized cost savings are expected to reach GBP 100 million, of which GBP 80 million were delivered in FY '26. We expect restructuring charges of around GBP 5 million and capital expenditure of approximately GBP 120 million. Based on the 26th of June spot rates, currency is expected to provide a circa GBP 20 million tailwind to revenue and have broadly neutral impact to adjusted operating profit. We continue to expect an adjusted effective tax rate of between 27% and 30%. As we move through the year, we remain confident that we can build on the progress we have made in quality of sales, continue to improve performance and drive sustainable long-term value. And with that, we will now be happy to take your questions.

[Operator Instructions] First question comes from Anne-Laure Bismuth with HSBC.

I have 2 questions, please. The first one is on the sales by National. So can we go back to the performance by our client cluster and share a bit more color on the group by nationality, particularly for the Chinese cluster and the evolution between onshore and offshore versus Q4. And my second question is about the retail like-for-like performance for the rest of the year. So as you mentioned, you expect to deliver revenue growth in line with consensus which is consensus at plus 5% for the full year but implying roughly the same growth for the rest of the year, but the basis of comparison is getting tougher through the rest of the year. So what gives you confidence you can continue to deliver a solid performance through the rest of the year? What are the elements in terms of product category full price sell-through that is supporting that outlook?

I will start with the clusters and then we'll talk about the outlook. So look, in terms of clusters, I mean the first thing I would say is that the comp growth overall, we're certainly seeing a really good growth in local customers everywhere. If we look at regions, I mean, you'll have seen Americas was very strong, both in the region and by cluster. We saw growth in locals and in tourists. And the 1 thing I would call out there is that certainly, we've seen Americans traveling to EMEA. So I think the strength of the brand locally is actually having a really good halo effect in that they're coming to Europe and they're really wanting to shop with Burberry. The EMEA region was down, but the EMEA cluster was up Again, if I look at the region, I would call that locals improved. So they were down in Q4, but locals were up in Q1, no surprise. You've heard it from everyone, tourists in the EMEA region were down. But really, that's very much the impact of less Asians coming over, clearly, with the Middle East conflict. That is having an impact on that travel hub. So we're seeing less tourists from Greater China and APAC. But as I've just said, American tourists in EMEA were certainly very positive. In the Middle East region, clearly, now we're dealing with 1 month of impact -- with 3 months of impact, sorry, rather than 1 but we did see a bit of an improvement in locals from Q4 to Q1. Greater China, very much driven by locals and intra-region tourist shopping. And the cluster there, we talked about it being up mid-single digit in Q4. No change there, still up mid-single digit in Q1 and the APAC region driven by both locals and tourists.

Do you want me to take that?

I am sorry.

I'll take the second part.

Yes, absolutely. Go ahead, Josh, with the second question.

No worries. Anne-Laure, today happens to be my second anniversary at Burberry in fact. And sitting here today, with our fourth consecutive quarter of positive comps. We're looking forward with clarity and confidence that the Burberry Forward strategy is working. This was our first print where we had women's, men's, accessories, and children's wear, all 4 of our divisions, positive comping together. And we get the confidence because we've had a very deliberate product strategy, and we're seeing the benefits of that strategy and the building blocks of that strategy come through in the financial performance of the business. So we've always said in product, we would lead with outerwear and scarves. And a big, I think, question that many of our analyst friends had was around the seasonality those businesses. And we've been very deliberate in outerwear in terms of having a seasonally appropriate offer for all 4 seasons of the year. So in this quarter, we had very strong sales of our new tropical gabardine introduction. On the backs of Portraits of an Icon, we were also selling these lighter-weight tropical gathering items in the quarter, shorter trenches like our Mayfair jacket. And then, of course, all of our lightweight nylon jackets as well this is the peak time of year, and you can see the growth that we've had in outerwear was really from those different building blocks [Audio Gap] about extending that authority to silk scarves, which were really a highlight in this quarter as well. And make this a 12-month a year business. We built on that heritage this quarter with the Hansa collaboration, which helped double our swimwear business for women and for men. In in men's casual ready-to-wear. A polo shirt is something where we had great authority in our Eddy Polo shirt. I remember talking to all of you a few years ago and saying that we had taken that out of the collection at one time. Now it's here and available in our Polo Galleries in 26 options. And those moves are also driving productivity in our stores when we introduced the scarf bars, when we introduced the Polo galleries, we're seeing productivity growth in our store network, which I know has been something very important for our analyst community and very important, frankly, for us to drive the productivity of these spaces. We'll be building on that with destinations for trenches going forward. Also, outside of our core, I have been very reticent to talk about this over the last quarters until we had real proof points. But now handbags, women's handbags are becoming a more meaningful part of the business. And this has been a very deliberate strategy. of finding our sweet spot with good, better, best pricing in a luxury context. We started the quarter -- or in the middle of the quarter, we had a very positive Mother's Day in the Americas where we were up double digits in the handbag category, but we have strength in women's handbags now across the geographies. And that's attracting new customers to the brand. And I think all of these initiatives help reaffirm my confidence of Burberry's place in the market as a luxury brand with broad universal appeal. As the luxury customer is looking for great value for money, whether that's a scarf for GBP 195 or a beautiful cash mirror trench for GBP 4,000 or a leather trench for GBP 8,000. They want great value for money and to feel like they're getting a product with real authenticity. And so there's never been a better time to be Burberry and to have our unique position in the market.

Josh, you were referring to space productivity improving. I wonder if you could give us a little bit more granularity on that front and how you are satisfied with both traction in what you're bringing to the market as well as rightsizing some of the stores that were diluting retail space productivity as far as I understood. My second question is on brand excitement and getting Burberry at the center of the stage. I thought the initiative you're taking in China is impressive. It dovetails with the DNA of the brand. I wonder if you have thought about the pipeline of initiatives like this that could potentially reenergize the excitement and the buzz around Burberry. My understanding is that you've done a lot to get the foundation correct to get the market position correct to go back to Britishness and the icons. And now that you have the foundation right, you could potentially work on that to get Burberry even more exciting. And I wonder if you have any input that you could share on that front? Lastly, my usual focus, I guess, how is off-price proceeding? And are we right to understand that this is now less important than it had been in the past? And can you give us any granularity on that?

Yes. All good questions. Do you want me to take that, Kate, do you want to start?

I start with the productivity space [indiscernible].

Perfect.

So yes, just on your first point, Loic, I mean, obviously, with comp plus 5% in Q1 and Q4, space slightly down absolutely indicates the positive trajectory of our store productivity. And look, we've guided broadly flat for the year. But within that, we've always been very clear that there will be movement as you saw in the last quarter. So absolutely moving out of nonproductive stores adjusting space where we need to. You want to take just Josh the second?

Yes, absolutely. So in terms of brand excitement, so you're absolutely right. We have worked really hard to build the foundation. And we are very excited about the momentum we're having in the marketplace. We had an extraordinary fashion show this -- for this winter collection and the campaign that accompanies it. I believe, will attract new customers to our brand. We saw that also with our Portraits of an Icon campaign specifically which had 23 global celebrities, and we used that as really an anchor to our 170th anniversary celebration. As we move through the year, we have some particular other initiatives that are happening. Burberry is this unique British brand that has so many stories to tell. And we are really at the nexus of speaking to our heritage and innovation. So in the fall, we will have a we will have a special display on the trench at the V&A in London. And then as we move later in the year, we will cap off our 17th year with an extraordinary exhibit in Shanghai to keep that drumbeat of activities with an emphasis yes, on our hometown in London, but also on the Chinese customer and the [Audio Gap]. We are going forward with confidence that the best is yet to come. In terms of the off-price, component. I think throughout our business, what you'll notice is the quality of sales improving. Whether it's in our full-price channel or in our outlet channel, the quality of sales is improving. We had less markdowns for this season because we had higher full-price sell-throughs. The customer is liking what they're seeing at full price, which require -- which is not requiring the amount of discounting and the type of markdown activity we did last year. So that is very much under control. And while we don't comment on the specifics of the outlet performance versus the full price performance I would say that the outlet village is particularly in Europe, continue to be very challenged with traffic. And so the performance that you're seeing is really led by the full price channel. A little more granularity on the full price channel and particularly within EMEA because that is a diverse market, we are seeing double-digit growth right now in our flagships in London and Paris. And those are being fueled by both the local customer, but also an influx of the American tourists. And so we're seeing the halo from the marketing investment that we have done in the U.S., literally traveling across the pond as those customers are spending more, engaging with us more in these cities. And as a signal of our confidence, today, we're announcing our new flagship in Milan, via Montenapoleone. This is a return to Montenapoleone where we left a few years ago to a really prime space, right, near the corner [indiscernible]. And you'll see the latest expression of Burberry in that environment. You also made a comment about the space reallocation in terms of productivity. We have several good examples of that around the world, one relatively close to home in where we exited a large aging store that was not particularly productive in Brussels, and we moved to a better location, which was which is smaller. And this new store has some of the visual merchandising and product destinations like the scarf bar and The Polo Gallery, and we're driving a much higher productivity in this space. And so you'll see examples of that really like that throughout the world, including at our Regent Street flagship, where we will have more to share in due course, but we've given up some underused back-of-house space in a former restaurant that was attached to the store, and we're going to be able to reformat the space in that very important store, which will be more productive in less square footage.

We now turn to Antoine Belge with BNP Paribas.

Yes. It's Antoine Belge at BNP Paribas. So 2 questions in the game. First of all, on the you highlighted the performance that you're achieving is really reaching out to most categories. But by region. And I understand that macro might be different. We had a very strong U.S. and in just to mention a few. So I don't know if there is something that would explain why you're doing much better in U.S. and Greater China than Europe? Or if you have any thought on that? . And the second question is about the share price reaction today on, I would say, in line number. So it seems that there could be a seasonality in the margins, starting with the gross margin. So if maybe we could understand why right, that's the case, especially it seems that from the previous question, the sell-through are quite good. So I'm not sure I understand why the margin, especially in H1, I would be -- maybe a bit below what people expected. And also, since you're happily confirming the consensus for the EBIT for the full year, which I think is GBP 246 million. Could you maybe mention some of [Audio Gap].

Calling out, in particular, in EMEA, where we are now seeing locals up. And of course, they were down in Q4. So I would say quite the reverse actually. We're seeing really good traction in our European cities. Really, the reason for the EMEA negative overall comp is, of course, the tourist situation. And that really -- we're seeing strong American tourists, as Josh mentioned. It's really the lack of Asians, of course, with the disruption of the Middle East travel hub that really is continuing to affect tourist flow into EMEA. So I think really actually encouraged by the performance in European cities. So look, on the second point on the gross margin phasing, I would guidance remains. I think what you're referring to really is a phasing point. And this is actually about the fact that we are now returning to a much more normalized phasing. And historically, pre all of the disruption of the past couple of years, we've always generated a higher gross margin in the second half as compared with the first half. And actually, -- this reflects -- there is a seasonal nature to the business. We do have more revenue in H2 versus H1, and we do tend to build up inventory ahead of our peak period. And therefore, naturally, you're going to get a little bit more provisioning in the first half as well. So growing, which is what we're now into growth mode, we are growing this business. The business is normalizing. So you would expect higher gross margin in the first -- in the second half versus the first half. But I would say for the full year, all as expected, you will see margin growth. So I think that really is going to play into a higher profit in the second half versus the first half. In terms of consensus, yes, we're happy with the GBP 246 million. There's a broad range out there. This is just Q1. You probably wouldn't expect me to start trying to move consensus at this stage. But are we feeling more confident whether it's in the short and indeed, more importantly, the longer-term trajectory for Burberry? Absolutely. Just to reiterate some of the points that Josh has made, we are continuing to see improvement quarter-on-quarter. We are seeing more and more proof points that the strategy is working. And therefore, whilst we are not changing consensus at this early stage of the year, we are certainly increasing in our confidence in Burberry forward.

Maybe just a follow-up very quickly. So gross margin, I understand so stronger in H2 versus H1. But for H1 of this year, will it be down year-on-year compared to H1 of last year?

It may be down slightly. I mean, probably may be down slightly.

We now turn to Thomas Chauvet with Citi.

The first one on China versus Chinese. It's been 3 consecutive quarters that Greater China LFL have outperformed the Chinese cluster by about 5 percentage points. So that suggests Chinese traveler spend outside Greater China remains quite negative in Europe and Japan. Do you think it could reflect a shift in shopping preferences where Chinese consumers are responding positively to initiatives in China, so localized marketing, client events and perhaps the price gap is irrelevant and the Chinese consumer starts to ignore the higher retail price they face when they shop at home versus abroad? My second question on licensing. Could you comment on the [ Coty ] destocking of all Burberry fragrances lines that was a drag on royalty sales and profit last year. Will that be largely over after the first half? I see consensus licensing is still plus 1% for the year. Could you also update us on your relationship with Coty at the time that just returned the Gucci license to Peering a year earlier than planned. Does that put you in a position of strength with Coty as one of their most important partners to strengthen the business from here or to reconsider certain aspects of the relationship of the contract?

Thank you, Thomas. Josh, do you want to talk a bit about the China market and then I'll licensing.