In a Turnaround, Burberry’s First Half Profit, Sales Surprise

London—Burberry Group PLC today reported first half profits that exceeded estimates as its most affluent customers continued to spend on its luxury products.

For the six month ended Sept. 30, Burberry said its adjusted pretax profit rose 7% to 173.4 million pounds (about $278 million). That compares with analysts’ average estimate for 167 million pounds and 162 million pounds in the year-ago period.

Net first half revenue was up 8% to 883 million pounds at constant exchange rates, with first quarter growth of 11% slowing to 5% in the second. Burberry’s retail/wholesale adjusted operating margin was up by 60 basis points to 15.5%.

Burberry alarmed its investors and sent shock waves through the luxurygoods business in September when it abruptly warned that this year’s profits would be on the low end of its range of 407 million pounds to 454 million pounds. The conservative outlook was due to what Burberry called a slowdown in sales by the “aspirational luxury consumer” who pulled back on spending due to economic woes or uncertainty. This included Chinese consumers who have been strong drivers of prestige luxury goods sales.

But last month the company said that sales had steadied the last weeks of its second quarter. Its retail sales in the first half also rose 10% on an underlying basis thanks to selling more of its higher end Prorsum and London merchandise.

In fact, Burberry now says that in the second half, average retail selling space is “on plan” to increase by about 14%, while underlying wholesale revenue will be “broadly” unchanged from last year.

Worrisome Factors Appear to Have ‘Leveled Off’

Full-year licensing revenue will also be similar to that of last year on a reported basis and excluding currency swings, the company said. Full-year capital expenditure remains unchanged at 180 million pounds to 200 million pounds, the company said.

For the full year, the company said it continues to expect a “modest” improvement in its retail and wholesale operating margin.

“We’re as solidly positioned for the second half as we’ve ever been, at least for the things that we can control,” Angela Ahrendts, Burberry’s ceo, said.

Although Burberry stock took a hit after the company’s September warning, Ahrendts said the sales slowdown was a phenomenon striking luxury brands across the board.

“We were the first ones to come out and say that… in every region around the world we were seeing that footfall [customer visits] had slowed,” she said. “We knew it wasn’t Burberry specific…and it was almost overnight. You have big regional things that are happening—elections, the changing of the guard, the euro crisis.”

Those factors seem to have “leveled off” which can be seen in the latest earnings report.

In other news, Burberry plans to takeover its fragrance and beauty business in April 2013 when the licensing agreement with Interparfums ends. Burberry will pay 181 million euros (about $232 million) in the second half to end its license with Interparfums SA. Of this, 73.8 million pounds was booked as an exceptional item in the first half.

 

 

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