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Burberry Sees Profit Setback Amid Declining Luxury-Goods Demand

Burberry Group Plc said earnings this year will be at the low end of analysts’ estimates as the company struggles to cope with ebbing demand in Hong Kong and Europe.
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  • Bloomberg

LONDON, United Kingdom — Burberry Group Plc said earnings this year will be at the low end of analysts' estimates as the UK's largest luxury-goods maker struggles to cope with ebbing demand in Hong Kong and Europe.

Wholesale revenue will drop about 10 percent in the first half of this year, the London-based company said Thursday, sending its shares down as much as 7.1 percent. Burberry also reported a slight drop in second-half sales.

The external business climate remains "challenging," chief executive officer Christopher Bailey said in a statement. Burberry's comments add to a slew of glum news for the luxury-goods industry after LVMH reported weaker-than-expected revenue growth and Prada posted its lowest annual profit in five years. Luxury-goods makers face ebbing demand in Europe after terrorist attacks in Paris and Brussels, as well as weaker conditions in Hong Kong and China.

Burberry’s outlook is “likely to be taken negatively for the whole luxury sector,” said Zuzanna Pusz, an analyst at Berenberg in London. The annual profit guidance implies a cut of about 5 percent to profit estimates, she said.

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Retail Decline

Burberry shares were down 6.2 percent to 1,262 pence at 8:10 a.m. in London. LVMH, Richemont and Hermes International shares also declined in Europe.

Burberry said sales at its own stores turned negative in the fourth quarter, falling 5 percent on a comparable basis. Retail revenue was unchanged in the prior three months.

The trench coat maker has been particularly affected by sliding demand in Hong Kong as it only has a small number of stores in Japan, where Chinese shoppers have shifted spending to take advantage of a weak yen.

The latest setback adds to pressure on Bailey, with analysts including Luca Solca at Exane BNP Paribas questioning whether he can lead the company effectively, while also being head designer.

"Christopher has two choices: either he spends more time with the product and design team, or he reinforces the creative leadership by hiring more high-profile talent — and moves closer to being a chief executive officer 100 percent," Solca said.

Sales fell 1 percent to £1.41 billion ($2 billion) in the six months through March, Burberry said. Analysts predicted £1.42 billion, according to the median of 17 estimates.

Adding to the struggles Burberry and Bailey are facing, tourist spending in Europe has fallen following the terrorist attacks in the region. Trends haven’t improved in France since November and it’s going to take a few more months to normalize, LVMH said Tuesday. US demand remained uneven in the second half, Burberry also said Thursday.

“We continue to focus on reducing discretionary costs and are making good progress with developing enhanced future productivity and efficiency plans,” said Bailey. Even so, analysts see margins narrowing for a third straight year.

By Andrew Roberts; editors: Matthew Boyle and Paul Jarvis.

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