Burberry Group plc (BRBY) Earnings Call Transcript

Good morning and thank you for joining Burberry's Q3 Trading Update Call. My name is Julie Brown, Chief Operating and Financial Officer of Burberry. And with me this morning is Julian Easthope, our Head of IR. Slides are available to accompany this presentation on the IR section of our website, and a transcript will also be made available. In November, we outlined our plan to accelerate growth and realize our ambition as the modern British luxury brand. This quarter, we continue to make progress against these strategic objectives. Comparable store sales grew 1%, impacted by COVID-19-related disruption in Mainland China, which fell 23%. We remain encouraged by our global performance. With comparable store sales growing 11% outside of Mainland China, with EMEIA, South Korea, Japan and SAP, all achieving double-digit growth. Throughout the period, we continue to amplify our brand with the Outerwear, Festive and Lunar New Year campaigns at the end of the period. Leather was the standout category with continued strong sales of the Lola range as well as very good traction from Giant Check and the Frances bag. Outerwear had a tougher quarter, affected by the exposure to Mainland China. But we still saw high single-digit growth in the rest of the world. The rollout of stores in the new format is progressing well, with 15 completed this quarter, and we remain on track to complete 65 stores this year. I'm pleased to say we continue to see these stores generating a higher AUR and retail productivity. In sustainability, we are pleased to report that we achieved an A rating with CDP and a AAA rating with MSCI for leadership in transparency and performance to tackle climate change. During the third quarter, we continued to build on our commitments to communities, partnering with OnSide to support their winter appeal. And finally, we have completed GBP 363 million of the GBP 400 million share buyback with the balance to be completed by the end of the year. Slide 3 provides more data on the breakdown of our retail sales. As mentioned, comparable store sales grew by 1% in the period. The impact of space is minus 1%, leading to flat retail sales at constant currency, and we still anticipate retail space to be broadly stable for the full year. Currency was a 5% tailwind this quarter with reported retail revenue landing 5% up compared with last year. Outside of Mainland China, we saw another quarter of double-digit growth at 11%. EMEIA delivered 19% growth, and this was primarily driven by tourists increasing around 80% year-on-year and accounted for around 40% of our sales, with Americans and Middle Eastern customers being the key driver. Overall, retail revenue from EMEIA nationals increased by low single digits. Taking a look at EMEIA as a region versus pre-pandemic levels, full-price sales are now well ahead and total retail revenue is now broadly stable. The Americas showed a slight improvement quarter-on-quarter, posting a 1% decline in Q3 from minus 3% in the first half. The brand elevation journey has led to higher AUR categories performing well, led by the female customer, especially in leather goods, but this was offset by pressure in entry-level categories. Globally, nationals from the Americas were 3% up this quarter, including tourist traffic mainly to EMEIA. Asia Pacific fell 7% in Q3, with Mainland China down 23% and the rest of Asia Pac up 16%. Mainland China saw volatile trading, affected by lockdowns and more recently by COVID outbreaks amongst our customers and client advisers. We saw a fall in traffic to stores in China during December, although there has been a good recovery in January. South Korea saw another strong quarter, rising 10%, similar to the 11% delivered in Q2. And Japan delivered a very strong performance, rising 28% this quarter, driven by leather goods, and South Asia Pac was up 15%. Given the importance of the Chinese customer, Slide 5 splits our performance in and outside of Mainland China. Group trading has been reasonably stable outside of Mainland China, so I thought I would provide more background on the impact of the Chinese customer. Pre-pandemic in 2019, Chinese nationals accounted for around 40% of group retail revenue with just over half shopping in Mainland China and the balance overseas. By contrast in this year-to-date, the Chinese only account for around 25% of our business, impacted by COVID-19 restrictions and the lack of international travel. While the timing and pace of recovery remains uncertain for the rest of this year, we are confident in the opportunity and the long-term prospects of the Chinese market. Returning to strategy. I will now take you through our initiatives in brand, product and customer experience in more depths. A key pillar in our strategy outlined in November is to harness the power of our brand. We made good progress in the quarter with the Outerwear, Festive and Lunar New Year campaigns. We started the second half with our Outerwear activations that were supported by over 50 pop-ups, VIP experiences, influencer campaigns and a partnership with Minecraft. We followed this with our Festive campaign starring Shakira and Burna Boy called ‘The Night Before’, which celebrated the excitement and anticipation of festive preparations. We saw a very strong traction and engagement with two joint Instagram posts with Shakira and our best non-collab reel to date. We ended the quarter with our Lunar New Year campaign, Take a Leap, inspired by the Year of the Rabbit, featuring a playful interpretation of the TB monogram. We are pleased to report that our brand investments have been well recognized with two awards recently. In December, Burberry won the Metaverse World and Gaming Experience Award at the 2022 British Fashion Awards, in recognition of our innovation in this space through partnerships with Blankos Block Party and Minecraft. We were also recently honored by the 2022 Prix Versailles Official World Awards, winning a category for our Imagined Landscapes pop-up in Jeju, South Korea. The awards celebrated the best in contemporary architecture, highlighting innovation and creativity as well as ecological efficiency and cultural impact. Moving to product on Slide 7. Supported by a dedicated campaign and a 360-degree program of commercial activations for Festive, accessories grew double digits outside of Mainland China. We made good progress in leather, launching new styles of the Lola bag, including the Vintage Check Bouclé option during Festive and continued to innovate across all ranges, seeing strong traction in our house codes. In addition to the Lola, the Giant Check and the Frances bag also performed well. Men's’ accessories grew strong double-digits with bags increasing over 25% and small leather goods up over 15%. Soft accessories also performed strongly during Festive with the iconic Archive Beige Check cashmere scarf generating 60% of sales for this category. Women's ready-to-wear comparable sales increased by a mid-teen percentage supported by dresses and the knitwear featured in our seasonal campaigns. Outerwear comparable sales grew high-single digits outside of Mainland China, with total sales affected by the high dependence on the Chinese market. Moving on to the next slide. I wanted to share an example of the investment we have made to improve customer experience and drive growth. In Hong Kong S.A.R, we now have 3 stores in the new store concept, Pacific Place, K11 MUSEA, and Lee Gardens, that positions us well as the border reopens with Mainland China. In December, we opened a highly successful activation, our first-ever ice rink over the K11 MUSEA Promenade in Hong Kong, designed with bespoke iterations of the TB monogram and Constellation graphics. This created a major buzz with ticket sales selling out and a very high level of retail and social media. The associated Outerwear pop-up achieved triple-digit growth versus the activation last year. Furthermore, on customer, we continue to elevate the in-store experience and strengthen distribution, rolling out our new concept to 15 more locations in the quarter across Asia, EMEIA and the U.S. Key highlights include Pacific Place, as mentioned, and North Park Center Dallas. We remain on track to achieve our target of completing 65 newly designed stores in full year '23, bringing the total to over 100 by the end of the year, equating to around 1/3 of the retail estate. In these stores, we continue to see a higher level of AUR and an improvement in store productivity and are pleased with the performance of the new store concept. Moving on to our ESG agenda. Our commitment to sustainability was recognized across key benchmarks in the period. We were commended by both CDP with an A rating and MSCI with a AAA rating for our transparency and performance across environmental issues. Burberry was one of a small group of organizations to achieve these ratings from both agencies. We also continue to support our communities through the cost of living crisis, partnering with Onside, a major use charity to ensure that young people can access food, warmth and safety this winter. And finally, the outlook. Overall, our near- and medium-term targets remain unchanged as we continue to target high single-digit revenue growth with operating leverage, ensuring good margin progression, notwithstanding the macro environment. It is still too soon after the reopening of borders and relaxation of COVID restrictions in Mainland China to understand the near-term effects, but we remain confident in the recovery and the potential of the Chinese market in the medium term. The only change to the outlook since we announced in November is currency. We now expect there to be a revenue tailwind of around GBP 160 million compared with GBP 170 million previously and with adjusted operating profit remaining the same at or around GBP 70 million, based on the 30th of December spot rates. All of the guidance areas remain unchanged and are shown in the appendix. Thank you for joining, and we can now move into the Q&A.

And our first question is from the line of Antoine Belge from BNP Paribas Exane.

It's Antoine Belge, BNP Paribas Exane. So two questions. First of all, is it possible to have an update on the cadence of the product launches from the new designer and also in terms of, first of all, presentation, fashion shows, but also in terms of product in store? And my second question relates to the EBIT consensus. After the trading statement of today, would you expect some changes in the EBIT for the fiscal year March '23?

So turning to your first question around the cadence. So we're really all looking forward to Daniel's debut collection in February. So we've got the show coming up in February. He's actually also going to be using existing product from Riccardo for launching a campaign, which is his aesthetic around Burberry with a great deal of influence in terms of the Britishness of the brand. So that's coming up in early Feb. In terms of the product going into the stores, his products will first go into the stores in September. And this will then be followed by the next fashion show, which will be in September, the spring/summer, and that will enter the stores in November and January. So we're all looking forward to that. There's a huge amount of excitement in the organization across the design teams and the marketing teams in commercial areas of the business around what's to come over the next few weeks. Just to come back to your point about consensus. So we believe in terms of first of all, revenue expectations, we do anticipate people will actualize for the results this quarter. And obviously, adjust for the exchange rate change as well. In terms of EBIT, we expect it to be -- remain broadly similar. Clearly, the big swing factor in this fourth quarter, I mean, the rest of the business outside of Mainland China is performing extremely consistently in double digits. We've delivered double-digit growth across all 3 quarters now, up 16%, up 15%, up 11%. The key, I guess, change factor is China and just how it reopens. Very optimistic about the market in the medium term. It's just getting through this reopening period due to infection levels. But overall, we'd expect consensus to remain broadly stable.

Okay. Let me just a follow-up. I'm not sure I understood what you said about the Riccardo Tisci's product. And so should we expect that there will be sort of an orderly discontinuation? Or should we expect, I don't know, any provisions to be made or anything like that?

Yes. Thank you for the question. Yes, we would anticipate an orderly progression. If you're thinking back to when Riccardo joined the business, there was a very significant change in the product because we were elevating the brand and we were elevating the product line. In this case, we anticipate a very smooth transition. So obviously, Daniel's debut will be coming through in February. He will perform to his new aesthetic for the brand at the beginning of February. And the show, obviously, will be entirely his product, which will then be going into our stores from September onwards. I think it's important also to say that the underlying business is in a much stronger position. So we've got around 1/2 of our range is continuity product, which will remain within the business. And then the newest element of our product range in total is around half of it. And obviously, that's the element that will start to change, and it will move over to Daniel's product over time. In terms of inventory, just coming back to your point about provisions, we've managed the inventory very well, I think. I mean, COVID was a great example, I think, of how we've managed our inventory. The inventory turn is actually the best it's been for about a period of 5 or 6 years, and the aging of the inventory is also in the best position, it's been for some time. So I think overall, we can anticipate an orderly transfer over to Daniel's product, and we don't anticipate any significant excess provisions at all. We anticipate it being stable.

The next question is from the line of Chiara Battistini from JPMorgan.

Can I just start maybe with China. And you've mentioned that the beginning of the year has been encouraging. I was wondering if you could provide us with more color and more evidence of what you're seeing so far, are you gearing up into Chinese New Year as well? And the second question is on the U.S. I was wondering also there, if you could elaborate further on the dynamics you saw throughout the quarter in your Q3 and also whether as the comps are getting increasingly easier, whether you're expecting to start turning positive into -- at the beginning of this year and into this year?

Thank you very much, Chiara. So just in terms of the beginning of the year with regard to China, as you know, we experienced a fall in traffic in December originally. Infection levels were relatively high in the country. I think we obtained data from the Chinese Center Disease Control, and they were quoting around 70% infection levels. So this immediately in December caused trading to be volatile. In fact, in our results, December was our worst month in the quarter in China, largely impacting footfall to stores, but also availability of our clients -- our own client advisers. So net-net, in the third quarter, just to give you a bit of a data point, the traffic was down 40% in the third quarter in China. Now the good news is, January has opened much more positively. We're seeing more promising signs. We've seen a total change in traffic, and we've seen some strong initial trade coming through. However, as you quite rightly referred to, Lunar New Year is earlier this year, it starts on the 22nd of Jan, whereas last year it started on the 1st of Feb. So I think we'll have a much clearer position on this once we're through the Lunar New Year period. But the early signs are very positive just in terms of trade, in terms of traffic, also in terms of the products, the higher AUR products that are being sold. Very importantly as well, clearly, that the Chinese consumer is very important nationally in Mainland China, but also important in terms of the tourism that it can bring. And we've provided some data points in this presentation just around the level of the Chinese consumer within our business, both pre-pandemic and post. Now the encouraging thing is traffic started to increase in terms of overseas travel. So we've had more Chinese consumers now moving into Hong Kong and also Macau is showing very good signs, very good green shoots. So I think the net-net effect is there are a number of key factors in favor with the reopening that we're seeing. One is, overall the market potential in China and the opportunity of the growth in the middle class, significant accumulated savings with our Chinese consumers and also policy easing. So the Chinese government has recently released a guideline to expand domestic consumption and investment, including economic drivers such as housing infrastructure, urbanization, supply chain and foreign investment. So net-net, while for the near-term it could be changeable, the medium- and longer-term prognosis is extremely positive. So moving on to the next question relating to the U.S. So first of all, we actually -- we saw a quarter-on-quarter improvement in Q3 compared with Q2, so we were minus 1%. And actually, when you look at the months in the quarter, we saw an improvement through to December. In terms of the comps, they do get progressively easier. The comps were very tough for the U.S. market in the first half of the year. And so we do expect to see a shift in the comps there. We're cognizant of the macro situation, though, and we're also cognizant of the credit card data -- the external credit card data that we pick up that shows a little bit more pressure building in the U.S. Our business results didn't show that, but we're cognizant to the external data.

And just following up, you mentioned in previous quarter, the softness at the enterprise point. Is that something that you continue to see during the quarter and to a different extent versus the previous quarters or similar?

No. We do still see pressure in the enterprise categories and particularly the shoe business, the sneaker business essentially that did very well in the prior period. The encouraging thing is we've seen further strengthening of the higher AUR categories. They've continued to perform well versus the prior year, particularly leather, and also a shift in women's bags to higher price points within the female bag range and the newer styles. So again, we're seeing this is very encouraging. So just to give you an example, Lola and the Birch Brown actually accounted for around about half of our leather sales in the United States. So very encouraging trends, I would say.

The next question is from the line of Louise Singlehurst from Goldman Sachs.

If I can two quick ones, a follow-up firstly on China. And Julie, given the drop off, particularly in December, can you just tell us about the inventory position? And if there's any excess seasonal product that's left over and how that will be treated or dealt with presumably the pickup at the beginning of the new year is very welcome from that perspective? And then secondly, just on, back to the U.S. If we think about the U.S. consumer in the spending from tourism in Europe, can you just remind us when that really picked up? Was that Easter last year? So presumably you're up against fairly easy comparables on the tourism in the beginning of the year? And just the demand, the appetite, will that consumer from the U.S. is purchasing in Europe in terms of products and price points?

Okay. Thanks, Louise. So first of all, with the China situation, we are actually really positive about the way we've been managing the inventory. I think actually, the learning through COVID was actually very valuable in managing inventory across the world, given the volatility in trading patterns. And we've adopted a policy whereby we've held more of the inventory centrally so that you can see the trends in each of the regions and deploy the inventory accordingly. So that has been a difference compared with prior years. We've managed the process well. We've redistributed products to faster-growing regions in Asia and in EMEIA. And we're really not at all concerned about the inventory levels as we head into the year-end. If we do have excess inventory, we have basically redeployed some of the inventory to other relevant regions. So no concerns on upfront. In terms of your second question, yes, certainly, we found Americans continuing to shop in EMEIA. We had this issue -- well, not an issue, but just a change in trend or a change in trade, I should say. We have this also happening in the second quarter, where we had a large number of American tourists coming into EMEIA and similarly, really with the third quarter. In terms of product point, we're seeing real strength in leather. So EMEIA -- both EMEIA and America as a country have performed really well in leather. We've seen that we've just posted double-digit growth, including China. So net-net, I think we're seeing a transfer to higher AUR categories and the leather goods range, particularly Lola, the Birch Brown, Check, Frances have all done extremely well.

The next question is from the line of Thomas Chauvet from Citi.

A few questions, please. Firstly, a follow-up on the phasing out of the legacy collections from Riccardo. How does it differ from 5 years ago? When -- I remember, there was quite a bit of disruption. It lasted quite a while when you had to clear the Christopher Bailey collection. So what's really different this time? That's my first question. Secondly, on pricing, can you just talk a little bit about pricing in the calendar Q1 and how you intend to reduce the price gap between Europe and China and the U.S. given the boom in tourism you're enjoying in the region? And just finally on the U.K., I think in a media interview this morning, Julie, you reiterated that Burberry would benefit from the tourist tax scheme. Just wanted to know how the discussion you had and other key participants are progressing with the government.

Thank you very much, Thomas. Some good questions. So first of all, with regard to the product and the difference and the difference compared with 5 years ago, I'd call out a number of major differences. The first one is 5 years ago, we were undertaking a major transformation of the Burberry brand, which included a major change to the product line and major change to the distribution that we had across the world together with the branding. And therefore, when Riccardo joined us, there was a significant change that was required in the product line. And you may recall, we only had about 1/4 of the business then in unit. And so now we're in a much stronger position. We've got a very well established, what we call carryforward business. So the lines that have got longevity is approximately half of our range. So that gives us stability through this period. And the major elevation of the product line that was significant 5 years ago, I mean, Daniel will bring, for sure, expertise in the areas he's very strong in leather goods, in particular, shoes for sure as well as his expertise in those. But we don't see the change being as significant. We've been focusing on strengthening our collections over the past 3 to 4 years. So I think that's the key first thing. And then the second thing is just the mix of the product in terms of the items that we've got in the range that we see having longevity will remain. And we expect those to remain strong and to continue to grow across the accessories lines and the ready-to-wear. So I think as we mentioned to one of the questions earlier, in terms of inventory, we don't see a major risk, and we see it being a relatively smooth transition. In terms of the next point about pricing and tourism. So taking the pricing point first, we have been, over the course of a while now, increasing the prices. So we started this in the fourth quarter of last year in terms of high single-digit price increases to our leather goods range and earlier, in fact, in full year '22 also. And then we undertook a further increase at the beginning of this year across the size of proportion of our rainwear and all of the jersey wear. In the middle of the year, there was a significant increase of mid-single digits, I would say, in the scarf range. And they're moving now into these more recent periods, obviously, with spring '23 going live. Again, we've had a sort of high single-digit increase in the pricing. So we are moving the prices accordingly together with drawing out more efficiencies in the supply chain to offset the headwinds from inflation and in particular, on logistics and freight. To your point about the price gap, there is still a price gap and differential between America and EMEIA. This is one of the reasons we're getting increased tourists coming from America into EMEIA. And we keep this under review. We decided not to make any regional changes to the price, the pricing architecture at this point in time, apart from a modest amount in Japan, but we keep it under review, and we'll continue to do so during the course of the next financial year. And then thank you for picking up on the point about VAT RES and the retail export scheme. We've been engaging very strongly with the government. And you may have heard from the CEO of Harrods on this as well. We have seen that there has been a marked difference in tourist spend going into Continental Europe versus the U.K., which is disappointing for ourselves and obviously, clearly, Harrods, being a major business luxury brand. So just to give you a little bit of data versus our full year '20, which was pre-pandemic, there's been a higher growth in U.S. tourists this quarter. So we've seen a 102% lift in Europe, but only a 63% increase in the U.K. The Middle Eastern traveler is even more stark. So versus pre-pandemic levels, they're up 122% in Continental Europe, whereas they're only up 14% in the U.K. So we would really like to change this and work closely with the government and our colleagues with the fashion -- the fashion group, we need to make a change here and introduce an incentive scheme.

The next question is from the line of Rogerio Fujimori from Stifel.

Rogerio from Stifel. I have two questions. Just with the mix composition in Q3 with less sales in China, lower sales in China and Outwear over indexed in China. Just as to confirm that you are comfortable and on track with the gross margin target of 70% at constant rates for the full year. And could you give us an idea of the contribution from volume in your 11% ex-China comp?

Okay. Thank you very much, Rogerio. So first of all, on the gross margin, we are working extremely hard on the gross margin to maintain the 70% that we've guided. The reason for this largely, and you've hit the nail on the head, it's not only the inflationary pressure that we're seeing in raw materials, freight logistics, but it's also the switch of the business, because we've now only got about 25% of the business in China. And of course, the margins tend -- the gross margins tend to be higher. They, obviously, have variable expenses going through OpEx, but the gross margin tends to be higher. So net-net, if there's a pressure on the margin, we're working very, very hard across both finance, commercial, merchandising, supply chain to maintain that 70% gross margin. We're holding the guidance. But there's a lot of work. I wouldn't underestimate the amount of work that's going on in the business to preserve that. So that's the first point. The second point, in terms of the business outside of China. We're absolutely delighted with how the rest of the business is performing. We've seen real underlying strength in the business. And as you know, the first quarter we had outside of China, 16% growth; second quarter, 15% growth; third quarter, 11% growth. We're very pleased. And it is a combination of volume increases, but also AUR. The AUR is a significant factor as we continue to elevate the brands and we continue to elevate the product line, obviously, together with some price increases that have gone through in the period. So yes, a combination of both for AUR is significant.