Reality Check: Burberry Profit Warning Casts Gloom Over Luxury Sector

A Burberry profit warning wiped $1.6 billion off its market value in one day. Should the luxury sector brace for a slowdown?

  • Share
  • Read Later
Nelson Ching—Bloomberg/Getty Images

On Sep. 17, when Burberry presents its S/S 2013 collection, chief executive Angela Ahrendts will take her seat on the front row. As always she’ll look immaculate in head-to-toe Burberry that will feature—on the back of a collar or on the lining of her coat—the brand’s iconic camel, red and black check pattern. But unlike in years past, her elegant handbag may harbor something decidedly less fashionable: the company’s recent profit warning.

The British fashion house issued the warning on Sep. 11, revealing that same-store sales were flat in the ten weeks leading to Sep. 8—the company’s worst figures since the financial crisis began in 2008. It also forecast that profits this year would fall at “the lower end of market expectations,” which have ranged from £405 million to £445 million (or $652 and $716 million). Following the warning, the Burberry share price plummeted 21%, wiping around £1 billion ($1.6 billion) off the company’s value in just one day.

(MORE: Read TIME’s profile of Burberry chief executive Angela Ahrendts)

Analysts now worry that Burberry’s slowdown could signal a reversal in fortune for the luxury sector at large, which rebounded more quickly from the global economic crisis than other sectors. The consulting firm Bain & Co. estimated that the global luxury market expanded to 191 billion euros in 2011—up 10% from the previous year. And in May it forecast that the sector would grow by another 7% in 2012, “defying initial concerns over Eurozone turmoil and fears of a cool down in emerging markets.”

That now seems premature as investors cash out of several top-flight brands. Switzerland‘s Richemont Group, which encompasses Cartier and Van Cleef & Arpels, fell 6% after Burberry’s warning. French luxury conglomerate LVMH reported a 4% drop in share prices. And Prada and Ralph Lauren also fell 4%.

To understand much of the woe, it’s important to look East. China—the engine that helped the luxury sector buck the recession—is experiencing its slowest economic growth in three years. And retail sales there are finally slowing. It’s possible that brands like Burberry, which have invested heavily in the world’s second-biggest economy, are now feeling the pinch.

(MORE: How to Build Your Own Burberry Trench)

Stacey Cartwright, Burberry’s Chief Financial Officer, doesn’t believe that tells the full story. At the time of the announcement she stressed that the company’s slide reflects macro trends, and not merely the slowdown in Asia, which accounts for 40% of its revenues. “We know from our partners that travel patterns are down,” she said after the announcement. “We know that GDP is down globally.”

That’s true. But in recent years Burberry has built up a massive footprint in China, severely exposing it to the local market. Antoine Belge, a luxury analyst at HSBC, says the Chinese consumer has developed sophisticated habits more quickly than anticipated. That means shoppers there now seek exclusivity, and eschew brands with “high logo content” like Burberry. (Both Bottega Veneta and Hermes—stealth, largely logo-less brands—seem to go from strength to strength). Sophisticated consumers don’t always respond well to wide distribution, either. Burberry has 66 stores operating in the country, compared to 39 for Louis Vuitton and 20 for Prada.

Burberry, which came to prominence during World War I when it produced trench coats for the British army, may also suffer from its focus on apparel, which accounts for around 60% of its sales. Accessories (including shoes and leather bags) and hard luxury (jewelry and watches) have higher margins than clothing, and typically demonstrate greater resilience during slowdowns. According to Bain & Co., hard luxury grew by 18% and accessories by 13% over 2011. Clothing only climbed 8%.

For now, execs seem to be taking comfort in the fact other well-to-do labels feel the pain, too. “We know we are not alone,” Cartwright told the Financial Times. There’s one other salve. Burberry, famed for its trench, can weather the storm in style.

(MORE: Actor Tom Hiddleston Models a Burberry Trench Coat)