LONDON, United Kingdom — Burberry reported sales Wednesday for the spring quarter, when lockdown measures to contain Covid-19 shuttered shopping districts around the world. The results were not quite as bleak as expected: the British luxury brand's retail revenues were slashed nearly in half for the quarter but improved toward the end of the period, falling only 20 percent in June compared to the same month a year before.

The rebound wasn't the only positive news Burberry had to share: sales in Mainland China grew by more than 30 percent last month. And there were signs that the brand's plan to sell more luxury leather goods has been gaining traction with young consumers in both China and Korea, the company said.

So why did shares tumble by as much as 8 percent when markets opened? The move wiped off more than half a billion pounds from Burberry's market value, before shares pared losses to 6 percent later in the day.

‘The virus lives with us’

Firstly, while the 49 percent drop in retail sales was more or less in line with analyst forecasts, Burberry's outlook for the rest of the year was more cautious than investors had hoped. The company said it expected sales to fall 15 to 20 percent again during the current quarter, implying that business is barely improving from June levels. Citing wider market uncertainty, the company declined to give any guidance for the full year.

"We're very cognisant of the fact that the virus lives with us, it stays with us until we've got a vaccine," Chief Financial Officer Julie Brown told analysts on a call. "Infection rates are going to be volatile, and therefore sales."

The company said it was cutting 500 jobs to cut costs in light of the downturn.

China underperformance

While Burberry's growth above 30 percent in Mainland China is an eye-popping figure, that isn't enough to make up for all the money Chinese clients aren't spending during shopping trips abroad. Burberry's sales to Chinese consumers worldwide actually fell by a mid-20s percentage during the quarter, with the drop narrowing to the mid-teens in June, Brown said.

Harry Winston-owner Swatch Group reported much faster Mainland Chinese growth, around 60 percent in June, while Louis Vuitton was flagging growth of 50 percent there as early as April. Unfavourable comparisons in the key China market could be seen as "pointing to underperformance versus the sector despite being at the crucial point of its turnaround plan," UBS analyst Zuzanna Pusz said in a note to clients.

A ‘Herculean’ challenge

While Burberry's comments focused on the uncertainty resulting from the coronavirus pandemic — an undeniable factor for all fashion brands right now — it's worth noting that many of its peers in the European luxury space did not react to the news in the same way. As one of the first luxury brands to report this quarter, its comments might have had a ripple effect through the sector. But shares in Hermès, LVMH, Kering, and Ferragamo all rose today while Burberry fell, indicating that investors believe there are problems specific to Burberry's business.

One of those problems could be Burberry's continued reliance on ready-to-wear, especially its classic trench coats. Shoppers are more comfortable buying bags and shoes online than clothing, which still typically need to be touched and tried on to close a high-end sale.

Bad timing could also be to blame: Burberry is in the middle of revamping its aesthetic and elevating its brand under a new Chief Executive Office, Marco Gobbetti, and Chief Creative Officer, Riccardo Tisci. The pair have been working to push Burberry upmarket, repositioning it as a pure-player in luxury: the British answer to Gucci and Louis Vuitton.

With an uncertain economy and new barriers to physical shopping, it's a particularly tough time to be trying to convert consumers to a new vision, particularly one that involves ramping up ultra-competitive categories, like luxury leather goods, where the brand is still building up its credibility. In the current climate, clients may tend to favour brands with a more established range of iconic products — think of Chanel's quilted flap handbags, or Louis Vuitton monogrammed totes: both instances where shoppers know exactly what they're getting before they leave the house. But taking a more accessible brand upmarket is a big challenge at any time.

"Gobbetti and Tisci aren't just relaunching the brand, they're also trying to elevate it. It's a Herculean effort, and having a market environment that is not supportive makes the work even more difficult,"said Mario Ortelli, founding partner at Ortelli&Co. luxury consultancy.

Shifting message

Last year, Burberry had touted Riccardo Tisci's aesthetic credentials as a turnaround trump card, citing strong sales growth for his new items and pledging to convert their entire offer to his vision as quickly as possible. Now, management is redirecting the focus to hiring new commercial directors for each product category — ready-to-wear, accessories and shoes — who'll report to directly to the CEO.

Tisci's name was hardly mentioned in today’s presentation. The ease with which one finds pieces featuring his interlocking “TB” print at steep discounts online suggests the strong response to his products may not be as broad-based as Burberry had hoped, which might explain the omission from today’s narrative.

“Riccardo’s vision has certainly generated interest in the brand, but the current environment has probably limited their ability to translate that into sales,” Ortelli said

Burberry's turnaround strategy previously called for the business to "accelerate and grow" this year following two years of broadly flat revenues, during which the company retooled its offer and distribution network. With the pandemic taking an acceleration off the table, the CFO is now saying its new plan for “phase two” is to “enhance the focus on product” and stick to elevating the brand.

“Now more than ever our strategy to anchor Burberry firmly in luxury fashion is key,” CEO Marco Gobbetti said.

While investors might accept that the pandemic has moved previous targets out of reach, they may still have been hoping for some more concrete guidance on where the company plans to go from here.

"Burberry seems more fragile than others, as its self-help brand relaunch is by no means achieved," Bernstein analyst Luca Solca said.

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