Pedestrians and shoppers walk past a Burberry Group Plc store on Canton Road in the Tsim Sha Tsui area of Hong Kong, China, on Saturday, April 18, 2015. Hong Kong is scheduled to release consumer price index (CPI) figures on April 21. Photographer: Billy H.C. Kwok/Bloomberg
Burberry's sales in Hong Kong 'decelerated further' in the second quarter

Shares in Burberry fell sharply following its warning on Thursday that sales had been hit by the slowdown in China, underlining the challenges facing the global luxury market.

The British luxury group said retail sales were affected by an “increasingly challenging environment for luxury, particularly Chinese customers”.

The shares ended 8 per cent lower at £13.05, having recovered from a 12 per cent fall earlier in the day.

Retail sales growth slowed from 8 per cent in the first quarter to 2 per cent, to deliver £774m of sales from stores and online in the six months to September 30.

Total sales — which also include wholesale and licensing businesses — were flat at £1.1bn, while sales from stores open at least a year rose 1 per cent. The sales growth missed analysts’ forecasts, which was for a more than 5 per increase in like-for-like sales in the first half.

Carol Fairweather, finance director, said sales from stores open at least a year fell 4 per cent in the second quarter, compared with a 6 per cent increase in the first. She blamed the deceleration on waning demand from Chinese consumers. “We believe the slowdown is macro,” she said.

However Burberry said demand was also “uneven” in the US, and weaker among local shoppers in London.

Anusha Couttigane, senior fashion consultant at retail research group Conlumino, said: “What this demonstrates is a mixed response to a brand which, just two years ago, appeared to be warmly welcomed the world over. “

Some analysts are questioning whether Burberry’s governance is limiting its flexibility, particularly in China. Since 2014, Christopher Bailey has served as both chief executive and chief creative officer.

“Your creative director being your chief executive too, would introduce a complicating factor, and possibly delay necessary adjustment,” wrote Luca Solca, head of luxury research at Exane BNP Paribas. “We have recently seen the case of Gucci, where chief and creative director proximity reduced available options and delayed change, for a time.”

Charmaine Yap, analyst at Jefferies, said: “In my view, perhaps this will spark questions surrounding his time allocation between his chief executive and creative role”.

She said the macro challenges would be a test for Mr Bailey, who had more support from market conditions since becoming chief executive 18 months ago. However, she thought investors would acknowledge the digital changes he has brought into the brand and be prepared to give him more time, before calling for any material change.

Burberry’s like-for-like sales in Hong Kong fell by more than 20 per cent in the three months to the end of September as fewer Chinese shoppers travelled to the region. Like-for-like sales in China fell by a mid single-digit percentage in the quarter.

Greater China accounts for about 25 per cent of Burberry’s sales, with 10 percentage points of this from Hong Kong, and the remainder from mainland China.

Demand in China has been hit by the corruption crackdown launched by President Xi Jinping in 2012, which made the purchase and display of expensive watches and designer accessories taboo among government officials and state-owned company executives who had driven the growth of Hong Kong’s luxury shops. More recently, the stock market turmoil has taken its toll on Chinese consumers.

Ms Fairweather said the group believed the problems were not specific to Burberry. “We have been quite clear that we believe that in this quarter it has been a challenging market for luxury consumers all over the world. This has been slightly amplified by our geographic mix,” she said. “In terms of the brand . . . the collections have been well received, social media remains very strong, and we have got an exciting festive programme. We believe the brand remains very strong.”

She pointed to strong sales of brand-specific items, including ponchos, scarves, trenchcoats and a handbag known as the “Banner” bag.

Ms Fairweather said Burberry had cut £20m that it would have spent throughout its financial year, by reining in travel and entertainment, and only recruiting for essential head office roles.

Consequently, full-year underlying pre-tax profit would be broadly in line with the average of those analysts that had recently updated their forecasts, at £445m. Before analysts began to cut their forecasts, the consensus of full-year underlying pre-tax profit was about £460m, Ms Fairweather said.

Burberry also said it was attempting to strengthen its products and service, and reallocating marketing spending to prepare for the crucial Christmas and new-year trading period.

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