Blackfriar: One man, two jobs a luxury Burberry could not afford

Christopher Bailey

The news that Christopher Bailey is stepping aside as chief executive to focus on what he does best – creative design – has to be good news for Burberry.

Mr Bailey is an incredibly talented designer but the City was never happy with him taking over a role he had little experience for.

It was also too much to ask one man to do two people’s jobs.

His refusal to attend city briefings, leaving his capable outgoing finance director Carol Fairweather to hold the fort, was also a worry for investors.

With job cuts ahead, slowing Chinese sales and global economic turbulence, Burberry needs an experienced CEO at the helm. Mr Bailey will be replaced as CEO by Marco Gobbetti, the Italian boss of LVMH brand Celine. ​​Mr Bailey will be moved to the role of president and retain his title of chief creative officer.​ ​​​

​​Burberry said that Mr Gobbetti has a “proven track record” for growing and developing brands such as Givenchy and Moschino.​ The fact that Ms ​Fairweather will also step down by the end of January after 10 years with the firm is a blow to the company at a time when Mr Gobbetti does not face an easy task.

The £90m Brexit induced currency windfall will provide a much-needed boost to the bottom line. The group​​ incurs about 40 per​ ​cent of its costs in Britain, but makes only 10 per​ ​cent of its sales in its home market and more than half of those come from foreign tourists in London, analysts estimate.

​The group saw like-for-like sales in Britain grow by a single-mid percentage, partly offsetting depressed trading in continental Europe, particularly France and Italy.

Despite this, Burberry faces severe challenges ahead. Shares in the 160-year-old firm ​have fallen 24 per​ ​cent over the past year as investors fretted about slowing global demand for luxury goods, particularly in China.​

Hong Kong, one of its biggest markets in Asia, continue​s​ to be tough, and demand in the Americas was uneven​.

​Analyst Tom Gadsby at Liberum said: “While the top team is much strengthened the business continues to face difficult conditions and we believe will continue to do so when the new management team starts in 2017.

“A weaker pound helps and we upgraded last weak to reflect the foreign exchange tailwind, but in our view Burberry is overly reliant on Chinese demand (40 per cent of sales versus 30 per cent for the industry) and that remains muted.”

He added that wholesale is also very weak, led by poor US demand.

“The first half is likely to be down over 10 per cent. The second half is also likely to be down,” said Mr Gadsby.

“We believe that forecasts are likely to come under threat when the new management team takes over in the new year.

“We would not be surprised to see expectations lowered following a strategic review.”

Steve Clayton, head of equity research at Hargreaves Lansdown, added: “Trading conditions are still tough and Burberry seem to be really suffering from the wider reluctance of Chinese tourists to spend like they used to.

“The challenge posed by this is clearly worsening and whilst the group is promising cost cuts and a share buy-back, there is little to get excited about in the near term.”

He said that longer term, he still likes Burberry as the business has a robust balance sheet and throws off a lot of cash.

“Luxury goods have been a good sector to be exposed to, because clients are prepared to pay handsomely for that special item, leading to good margins most of the time,” said Mr Clayton.

“Moreover, while luxury consumers are not risk-free clients, they do tend to be resilient, because wealth is typically more durable than income.

“Burberry still has plenty of potential, but it could take a while for the good news to outweigh the bad.”

Like the UK as a whole, things are likely to get worse for Burberry before they get better.

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