Burberry shares plunge on concerns over new strategy

A Burberry store in Tsim Sha Tsui, Hong Kong (Photo By Mparweo – Own work, CC BY-SA 3.0)

LONDON— Shares in British fashion icon Burberry plunged as much as 14 per cent Thursday after it said sales will stagnate for the next two years as the company shifts strategy to focus even more on the high-end luxury market following the departure of designer Christopher Bailey.

Burberry plans to pull back from department stores, starting in the U.S., and remodel its own shops to enhance “luxury service.” The company said it is responding to a changing market in which the luxury consumer now “demands innovation, curation and excitement.”

Investors were more focused on the cost of the strategy shift, with Burberry saying revenue will remain “broadly stable” for the next two fiscal years and restructuring costs will rise by 51 million pounds ($67 million). Burberry shares fell 9.1 per cent to 1,804 pence in midday trading in London after dropping as low as 1,702 pence.

“The market is now being asked to back him in a ‘no pain, no gain’ strategy shift,” Steve Clayton, a fund manager at Hargreaves Lansdown in London, said of the CEO, Marco Gobbetti. “Early evidence suggests (Gobbetti) has not carried the crowd with him.”

Bailey, Burberry’s chief creative officer, said on Oct. 31 that he plans to leave the company in 2018, ending a 17-year stint in which he helped transform the brand into a global luxury icon. He previously stepped down as CEO after struggling to reinvigorate sagging sales in the company’s key Asian markets.

Bailey’s ideas influenced all of the company’s operations, from the fashions on the runway to the mood in the stores and a shift toward online marketing.

He banked on Britishness and incorporated it into the look and feel of the offering. He turned a company that once made trench coats for World War I officers and tents for arctic explorers into the producer of must-have styles for the likes of Kim Kardashian and Cara Delevingne. He also championed the digital marketplace with innovations such as allowing shoppers to immediately buy online what they saw on fashion show catwalks.

But that didn’t stop Burberry from suffering a sharp fall in sales in Asia, where slower economic growth and a Chinese government crackdown on luxury gifts hurt the brand’s sales under his watch. Investors looked to Gobbetti to jumpstart the company.

“To win with this consumer, we must sharpen our brand positioning,” the company said in its strategy statement. “This will require us to change our approach to product, communication and customer experience. Building on our strong foundations, we will establish our position firmly in luxury enabling us to deliver sustainable long-term value.”

The cost of making that shift means investors will have to reduce their forecasts for fiscal 2019 earnings by as much as 10 per cent, said Ken Odeluga of Cityindex.com.

“In short, Burberry’s strategy update makes sense as it will equip the group for the new world of luxury, but it is essentially a profit warning,” Odeluga said.