Burberry Falls Victim to Hong Kong Protests Eroding Sales

(Bloomberg) --

Burberry Group Plc became the latest victim of the Hong Kong protests as sales in that market dropped by half over the Christmas quarter, while the spread of a new viral disease in Asia risks dimming the outlook further.

The stock fell as much as 4.1% even after the company raised its forecast for full-year sales growth to a low single-digit percentage.

Asian demand is crucial to the British maker of $2,000 trenchcoats and $470 scarves, which gets about 40% of its sales from Chinese shoppers. After political protests in Hong Kong led to store closures and weighed on tourism for months, the luxury industry is now bracing for the impact of a lung ailment that first appeared in China in December. Hong Kong reported a suspected first case of the disease today.

The World Health Organization is set to decide Wednesday whether to declare the virus an international public health emergency, just before millions of people prepare to travel for the Chinese Lunar New Year holiday. That could weigh on tourism and consumption on the mainland, where growth has been compensating for the slump in Hong Kong. Burberry is preparing to showcase its autumn-winter collection in Shanghai for this first time in April.

Retail growth came in just ahead of the consensus for the company’s fiscal third quarter, which ran through December. The stock has been strong recently, gaining 27% in 2019.

Revenue in Hong Kong slumped in the period as the protests led to a drop in Chinese tourists. Sales on the mainland rose more than 10%. Burberry said it’s trying to lower rents in Hong Kong to lower costs there.

While Burberry’s global growth has improved, it’s still lagging peers nearly two years after the head designer, Riccardo Tisci, was hired and about three years since Chief Executive Officer Marco Gobbetti joined. Both came from top luxury rival LVMH.

Revenue Key

The company is targeting improvements in profitability from next year, yet top-line growth is the priority at this point, Chief Financial Officer Julie Brown told reporters on a conference call.

“We’ve got the cost base under tight control,” Brown said. “We’re in a position to leverage the business. That said, we will always prioritize investment. We believe the revenue growth is key at this stage.”

A retooled aesthetic with new products, logos, and store decor is fueling interest at Burberry. New products made up three-quarters of the assortment. But with stores as far-flung as a boutique in Paris’s posh 8th district and an outlet mall in Dawsonville, Georgia, the transition to a new Burberry is taking time.

“Brand heat is improving but we are unsure that it is strong enough to take market share from the sector winners,” wrote Piral Dadhania, an analyst at RBC. The company previously forecast flat sales this year.

©2020 Bloomberg L.P.

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