Fashion world in shock as British clothing giant Burberry issues profit warning amid difficult conditions for 'middle market' brands

 

It’s the hottest 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 when British clothing giant Burberry issued a profit warning today.

Like-for-like sales ground to a halt in the 10 weeks to September 8, 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 £1 billion 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, while continuing to execute on our proven five key strategies,” 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 conceivably be both.

The announcement was in stark contrast 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 “uber 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. Brand 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 strong growth, he said Burberry needs to keenly address the customer’s need. “Luxury brands aren’t renowned for being customer centric. They don’t listen to what the customers want and instead they set the trends and tell them what to buy. Moving forward, they need to take a good look at which products are gaining traction in which markets.”

Jaana Jatyri, CEO of Trendstop.com, said Burberry had fallen foul of the fickle fashion world: “In this economic climate, people are watching what they spend no matter how affluent they are. The margin of error is so small that everything has to be perfect. Customers today aren’t loyal to one particular brand.”

Kate Calvert, an analyst at Seymour Pierce, was more positive. “There is a global slowdown for luxury brands, but the underlying signs for the market are still very good,” she said. “There’s still wealth creation in emerging markets.”

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