LONDON (BLOOMBERG) - Burberry Group's long-awaited strategy update from its new boss failed to convince investors, who sent the shares tumbling the most in five years on concern the trench-coat maker is sacrificing future earnings to sharpen its luxury image.
The shares fell as much as 14 per cent after chief executive officer Marco Gobbetti said the London-based company will expand its line-up of accessories and leather goods and revamp its marketing while investing in store refurbishments. As a result, revenue and the operating margin will be flat in the 2019 and 2020 fiscal years, with 15 million pounds (S$26.8 million) of restructuring charges expected in the first of those years, Burberry said.
"Burberry's premium valuation already discounts an overly optimistic view on brand turnaround potential, of which visibility is still limited," Bank of America Merrill Lynch analysts led by Ashley Wallace said in a note.
The changes mark an evolutionary shift from the approach pursued by creative head and ex-CEO Christopher Bailey, who's set to leave next year after elevating Burberry from its more utilitarian roots.
Under its former chief, the company already moved to reduce its exposure to mass-market retail outlets in the US, where its brand image has been diluted by wide availability and extensive discounting. In an effort to give Burberry a more exclusive aura, the company also merged the London, Prorsum and Brit labels into its main brand.
"To win with this consumer, we must sharpen our brand positioning," Burberry said in a statement. "This will require us to change our approach to product, communication and customer experience."
Mr Gobbetti took over as CEO this year after joining from LVMH's Celine, where he helped to give the fashion and leather brand an upscale gloss with a line-up of must-have handbags. Leather goods have also served as the cash cow for the French luxury conglomerate's Louis Vuitton division.
"We are creating relevant product to recruit the new fashion client," merchandising chief Judy Collinson said at a briefing in London.
"One of the most visible ways Burberry can renew brand perception is handbags. Handbags are a sign of prestige."
Burberry's new US$2,500 DK88 bag, for example, is priced comparably to offerings from some high-end luxury brands, while polo shirts and other items in the company's line-up cost only half as much.
Mr Gobbetti's plan could cut earnings by 15 per cent for fiscal 2019 and 2020, Morgan Stanley analyst Elena Mariani said in a note. The store refurbishments and other upgrades will result in capital expenditure of 150 million pounds during those years, Burberry said, with an increase to as much as 210 million pounds in the medium term.
Finding a new creative director to replace Bailey will "take some time," Mr Gobbetti said Thursday at the briefing, declining to comment on speculation about candidates.
The drop in the shares came after the stock rose to a record earlier this week when Mr Kevin Wills, chief financial officer of Tapestry, formerly known as Coach, said the New York-based company is seeking strategic acquisitions.
Burberry's strategy update came as the company reported that first-half revenue rose 4 per cent on an underlying basis, above analyst expectations.
Growth was strongest in the company's own stores in the Asia-Pacific region, the company said.