Burberry suffers as Primark booms in a tough market

There were differing fortunes yesterday for companies at the top and bottom of the clothing sector. By Liam O'Brien

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The Independent Online

It's a hot ticket at London Fashion Week, and a brand that has recovered from its "chavvy" connotations to become a global powerhouse in the world of luxury style. So the fashion world – and the stock market – was understandably shocked yesterday when British clothing giant Burberry issued a profit warning.

Like-for-like sales ground to a halt in the 10 weeks to 8 September, meaning its pre-tax profits for the year will come at the lower end of expectations. Analysts had predicted a total of between £407m and £455m. Following the announcement, shares slumped by almost 19 per cent, wiping £1bn from its market value in what one analyst described as "shooting the messenger" over a crisis across luxury brands.

Burberry CEO Angela Ahrendts said the company's second quarter growth had slowed against "historically high comparatives" in a "challenging market". "Given this background, we are tightly managing discretionary costs and taking appropriate actions to protect short- term profitability," she added.

In the short term, the company's headcount has been frozen, travel expenditure will be cut and new IT projects have been deferred. The long-term strategies, including expansion into emerging markets and a diversification into non-clothing products, are still in place.

As luxury giants LVMH (behind Louis Vuitton) and PPR (Gucci, Alexander McQueen) took single digit hits, analysts pondered whether there could be a problem with growth across high-end manufacturers. Ahrendts didn't specify whether results were hit in Western markets or emerging markets – leading to speculation it could be both.

The announcement was in stark contrast to an optimistic forecast at the opposite end of the retail sector. Primark said like-for-like sales had increased by 3 per cent in the year to 15 September, with 19 new branch launches increasing overall sales by 15 per cent.

Neil Saunders, managing director of retail analysts Conlumino, said the current economic climate protected super-cheap brands such as Primark, as well as those who sell to the "über wealthy", but Burberry is a different beast. "In Western markets, a lot of Burberry's success is predicated on the fact they sell to a wide market. It may be a luxury brand, but middle-market consumers will stretch their budget upwards to purchase Burberry items," he said. Brands that sell to the middle market, such as Marks & Spencer, have had a difficult year.

Growth in China has slowed, Mr Saunders said, because "luxury businesses have piled into those markets so now it's much more competitive". In an environment where companies can no longer rely on Asian and Latin American markets for growth, Burberry needed to address customers' needs, he said.

Jaana Jatyri, CEO of Trendstop.com, said Burberry had fallen foul of the fickle fashion world: "In this climate, people are watching what they spend."

The first store opened in Dublin in 1969, but aggressive expansion in the UK and Europe in recent years has seen that number soar to 242 today, with 19 stores opened in the last year alone. Unashamedly cheap, Primark apes trends and appeals to a young but trend-savvy clientele. Skinny jeans sell for £11, and analysts are forecasting group profits (it's owned by Associated British Foods) for this year of £970m.

Founded in Basingstoke in 1856 by a draper's apprentice and later renowned for its distinct tartan pattern, Burberry saw its yearly sales boom to £3.5bn last year with the help of CEO Angela Ahrendts's commercial wiles and chief designer Christopher Bailey's fashion nous. Burberry has more than 500 outlets, and women's trench coats from the top Prorsum line start at £1,095.