Burberry shares dive on concerns over cost of going upmarket

Mr Marco Gobbetti took over as Burberry's CEO this year. The Burberry Spring/Summer 2018 show at the London Fashion Week on Sept 16 this year. Store refurbishments and other upgrades will result in capital expenditure of £150 million (S$268 million
The Burberry Spring/Summer 2018 show at the London Fashion Week on Sept 16 this year. Store refurbishments and other upgrades will result in capital expenditure of £150 million (S$268 million) in the 2019 and 2020 fiscal years, Burberry said, with an increase to as much as £210 million in the medium term.PHOTO: REUTERS
Mr Marco Gobbetti took over as Burberry's CEO this year. The Burberry Spring/Summer 2018 show at the London Fashion Week on Sept 16 this year. Store refurbishments and other upgrades will result in capital expenditure of £150 million (S$268 million
Mr Marco Gobbetti took over as Burberry's CEO this year. PHOTO: REUTERS

LONDON • Burberry's long-awaited strategy update failed to convince investors, who sent the stock tumbling yesterday on fears the firm is sacrificing future earnings to sharpen its luxury image.

The shares fell as much as 14 per cent after chief executive Marco Gobbetti said the London-based fashion firm will expand its line-up of accessories and leather goods and revamp its marketing while investing in store refurbishments.

As a result, revenue and operating margins will be flat in the 2019 and 2020 fiscal years, with £15 million (S$26.8 million) of restructuring charges expected in the first of those years, Burberry said.

The changes mark an evolutionary shift from the approach of creative director and former CEO Christopher Bailey, who is set to leave next year after elevating Burberry from its more utilitarian roots.

Under its former chief, the firm moved to reduce its exposure to mass-market retail outlets in the United States, 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.

"We must sharpen our brand positioning," Burberry said. "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 products to recruit the new fashion client," merchandising chief Judy Collinson told a London briefing.

"One of the most visible ways Burberry can renew brand perception is handbags. Handbags are a sign of prestige."

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.

Store refurbishments and other upgrades will result in capital expenditure of £150 million in those years, Burberry said, with an increase to as much as £210 million in the medium term.

Finding a new creative head to replace Mr Bailey will take some time, Mr Gobbetti said yesterday.

The stock had hit a 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 it reported that first-half revenue rose 4 per cent on an underlying basis, above expectations.

Growth was strongest in its own stores in the Asia-Pacific.

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A version of this article appeared in the print edition of The Straits Times on November 10, 2017, with the headline 'Burberry shares dive on concerns over cost of going upmarket'. Print Edition | Subscribe