Annual Financial Report

RNS Number : 5950N

Burberry Group PLC

14 June 2010

 

Annual Financial Report

Burberry Group plc

Pursuant to Listing Rule 9.6.1, Burberry Group plc (the "Group") has today submitted two copies of the following documents to the Financial Services Authority (the "FSA"):

1.   Annual Report and Accounts for the year ended 31 March 2010 (the "Annual Report");

2.   Notice of Annual General Meeting (the "AGM Notice"); and

3.   Form of Proxy.

These documents are also available on the Burberry Group plc website at www.burberryplc.com and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility which is situated at: The Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS.

The Group is proposing to adopt new articles of association (the "New Articles") at the Annual General Meeting ("AGM") and two copies of the New Articles have been sent to the FSA in accordance with DTR 6.1.2 of the FSA's Disclosure and Transparency Rules.  Key changes to the Group's existing articles of association are set out in the AGM Notice.

In compliance with DTR 6.3.5, the following information is extracted from Burberry Group plc's Annual Report and Accounts for the financial year ended 31 March 2010 (the "2009/10 Annual Report and Accounts") and should be read in conjunction with Burberry Group plc's Preliminary Announcement issued on 26 May 2010, both of which can be viewed at www.burberryplc.com.  Together these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service.  This material is not a substitute for reading the 2009/10 Annual Report and Accounts in full and page numbers and cross-references in the extracted information below refer to page numbers and cross-references in the 2009/10 Annual Report and Accounts.

ADDITIONAL INFORMATION REQUIRED BY DTR 6.3.5

RISKS

The following information is extracted from pages 48 to 51 of the 2009/10 Annual Report and Accounts.

The management of the business and the execution of the Group's growth strategies are subject to a number of risks. The risks set out below represent the principal risks and uncertainties which may adversely affect the management of the Group and the execution of its growth strategies

The steps the Group takes to address these risks, where they are matters within its control, are also described. Such steps may mitigate but not eliminate these risks. Some of the risks relate to external factors which are outside the Group's control. The order of the risks is in no way an indication of their relative importance, and each of the risks should be considered independently. If more than one of the events contemplated by the risks set out below occurs, it is possible that the combined overall effect of such events may be compounded.

Risks are formally reviewed by the Group Risk Committee (the 'Committee') who meet at least three times a year. The membership of the Committee comprises the Chief Executive Officer, Executive Vice President - Chief Financial Officer, Executive Vice President of Corporate Resources, Chief Operations Officer, Senior Vice President Commercial Affairs and General Counsel and the Director of Audit and Risk Assurance. At the invitation of the Committee, the Director of Intellectual Property, Director of Corporate Responsibility, Head of Risk Management and representatives from other assurance teams regularly attend Committee meetings. The assessment of the Group's risks and the processes in place for management and mitigation of these risks are reviewed by the Audit Committee on a regular basis. Key business risks are also considered by the Audit Committee and are considered generally as part of the Group's strategic development and ongoing business review processes.

The global economic downturn affected consumers' purchases of discretionary luxury items which has adversely affected Burberry's sales in certain markets

In common with all Burberry's competitors, the global economic downturn affected the level of consumer spending on discretionary luxury items. During a recession, when disposable incomes are lower, a global downturn will adversely affect Burberry's sales in certain markets. A significant proportion of the Group's sales are generated by customers (in particular Middle Eastern, Russian, Japanese, Chinese and other Asian customers) who purchase products while travelling either overseas or domestically. As a result, shifts in travel patterns or a decline in travel volumes could materially affect trading results.

Following a further review of Burberry's Spanish business, the Group announced the planned restructuring of its Spanish Operations consistent with its strategy of aligning Burberry in Spain with its global business model.

Changes to the political regime or tax and fiscal regulations in the countries in which the Group operates could have an adverse impact on the Group's operations or revenues

The Group operates in many countries including the emerging markets. These countries have a variety of legal and regulatory systems which may be changed retrospectively or prospectively and which may not be enforced in a predictable or consistent manner, particularly in times when public sector debt is high and tax revenues are falling. Furthermore, some of these countries have not had stable governments historically and have been subject to political instability.

When the Group enters a new market, governance processes are in place to monitor the implementation programme, which includes oversight by the Group's legal, company secretariat, tax and audit and risk assurance departments. The Group uses the services of professional consultants to advise on legal and regulatory issues and to monitor ongoing developments.

If Burberry loses key management or is unable to attract and retain the talent required for its business, its operating results could suffer

Burberry's performance depends largely on its senior managers and design teams. The resignation of key individuals or the inability to recruit individuals with the relevant talent and experience to enable future business growth could adversely impact Burberry's performance.

To mitigate these issues the Remuneration Committee regularly benchmarks the Group's incentive arrangements against Burberry's global competitors and considers the framework in place to recruit, incentivise and retain key individuals. In addition, there are regular ongoing recruitment, talent review and succession planning programmes overseen by the Executive Vice President of Corporate Resources and Chief Executive Officer to ensure that the Group strengthens and develops its senior

management team by identifying, developing and nurturing high-potential talent. During the year, the Group introduced a Leadership Council to identify and develop high-potential individuals within the organisation.

The cumulative change and significant growth within the business places a significant pressure on resources and its IT systems

The combination of the continued development of the Group's IT infrastructure, the focus on maximising the benefits of digital media, combined with the ongoing development of the global supply chain and the implementation of a number of other significant projects combine to exert significant pressure on the business.  Governance processes are in place for each major programme to monitor and manage the progress of these initiatives and these are supplemented by monthly operational meetings with senior management to review operational performance. The senior management team has been strengthened and organisational structures realigned to further support these key initiatives and external consultants are used to complement internal skills where required.

There is a risk of over-reliance on key trading partners

In a number of key product categories Burberry is reliant on a small number of suppliers. During the year, the Group continued to strengthen its supply chain management team to enable the further evolution and development of the manufacturing base and also to mitigate the risk associated with over-reliance on a number of key product suppliers. Where suitable alternatives exist, the Group has reduced volumes with such suppliers and continues to look for suitable additional alternatives where necessary.

The Group has a number of key customers whose business represents a substantial portion of sales. The Group dedicates resources to these customers and maintains close relationships with such customers to understand and respond to their needs.

The Group closely manages its relationships with key suppliers and customers which includes monitoring their financial and non-financial performance.

A substantial proportion of the Group's revenue and profits is reliant upon business in Japan and key global licensees

A significant source of profit is derived from the royalties received from licensees, specifically the Group's licensees in Japan and the fragrance licensee InterParfums S.A. Burberry relies upon licensees to, among other things, maintain operational and financial control over their businesses. Should these licensees fail to effectively manage their operations, the Group's royalty income would decline. Failure to manage these key relationships effectively could have a material impact on the sales, profitability and reputation of the Group.

The Group regularly implements royalty reviews and audits of licensees, but cannot guarantee that they will reveal any non-compliance with the terms of the relevant licence.

To minimise the risks in Japan, Burberry has its own offices and operations in Tokyo and closely monitors its relationships with licensees. During the year, the Group amended the terms of its apparel licence with Sanyo Shokai and Mitsui in Japan. The amendment, together with the non-apparel joint venture formed with Sanyo Shokai and Mitsui in November 2008, better positions the Group to optimise its presence in Japan and the high-growth Asian region.

Burberry may be unable to control its wholesale and licence distribution channels satisfactorily

The Group relies upon the ability to control its distribution networks and licensees to ensure that products are sold in environments consistent with the Group's luxury image. An action by any significant wholesale customer or licensee, such as presenting Burberry products in a manner inconsistent with our preferred positioning, would be damaging to our brand image. If, due to regulatory, legal or other constraints, the Group is in any way unable to control its wholesale distribution networks and licensees, the Burberry brand image, and therefore results and profitability, may be adversely affected.

The Group relies upon its licensees, suppliers, franchisees, distributors and agents to comply with relevant legislation

The Group expects its licensees, suppliers, franchisees, distributors and agents to comply with employment and other laws relating to their country of operation and to operate to good ethical standards. The Group, however, is unable to guarantee that this is the case, although it continually monitors and improves its processes to gain assurance that its licensees, suppliers, franchisees, distributors and agents comply with its terms and conditions and relevant local legislation and good practice.

Burberry could suffer if its supply chain is unable to produce and deliver goods at a competitive price, on time and to its specification

If Burberry's suppliers fail to ship product on time, or product quality does not achieve Burberry's standards, this could result in the Group missing delivery dates to its customers, potentially resulting in cancelled orders or price reductions. Further, such a failure could affect wholesale customers' confidence which could adversely affect subsequent seasons' sales.

Burberry continues to evolve its supply chain strategy, refining its selection of suppliers to maintain and enhance product quality whilst improving sourcing efficiencies. The Group continues to rationalise its distribution network to minimise unnecessary costs and to improve delivery timeliness and accuracy.

The Group's planning and pricing function has continued to improve inventory management processes and effective product flow, facilitated by improved reporting and visibility provided from the new IT infrastructure. Further opportunities exist to improve inventory management processes and these will help ensure that the Group continues to produce merchandise of the right quality, in accordance with its ethical policy and delivered in accordance with its requirements.

During the year, the Group announced the restructuring of its Spanish operations consistent with its strategy of aligning Burberry in Spain with its global business model.

The inability to anticipate and respond to changes in consumer demand and product category trends on a timely basis could adversely impact sales

The Group's business depends, in part, on the ability to shape, stimulate and anticipate consumer demand by producing innovative, fashionable and functional products. Categories are cyclical, so it is critical the Group builds responsive product teams to exploit trending categories, launch new categories and balance core apparel and non-apparel categories.

The Group has evolved its product hierarchy and design calendar to enable continued brand momentum, product refreshment and replenishment to be more responsive to fashion and consumer trends and to respond more efficiently to changing circumstances.

Burberry continues to protect its classic core market by adding innovation to further stimulate sales to current customers, while attracting new customers to the brand. The Group balances and plans all categories and brand icons through a strict product hierarchy. To continue brand momentum, and to protect market share in apparel and non-apparel categories, the Group features outerwear and the Burberry Check icons as part of its marketing initiatives.

In response to high demand, the Group introduced the April Showers capsule range in April 2010 to fulfil consumer demand and drive brand momentum.

Burberry is dependent on the strength of its trade marks and other intellectual property rights

Burberry's trade marks and other proprietary rights are fundamentally important to the success and competitive position of the business and are intrinsic to maintaining brand value. Unauthorised use of the 'Burberry' name, the Burberry Check and the Prorsum horse trade marks, in particular, as well as the distribution of counterfeit products damage the Burberry brand image and profits. If a third-party registers one of the Group's trade marks, or similar trade marks, in a country where the Group does not currently trade, this would create a barrier to commencing trade under those marks in that country. In addition, if a third-party publishes harmful material using our trade marks, Burberry's brand image could suffer. The Group has a dedicated team operating internationally to register, protect and enforce its trade marks and other intellectual property rights. Where infringements are identified, the Group resolves these through a mixture of criminal and civil legal action and negotiated settlement.

Nevertheless, it is not possible to guarantee that the actions taken to establish and protect the Group's trade marks and other proprietary rights will be adequate to prevent imitation of Burberry's products by others. Trade marks and intellectual property rights, while subject to international treaties, are largely driven by national law and the protection of intellectual property rights varies from one jurisdiction to another. 

The Group cannot therefore necessarily be as effective in all jurisdictions in addressing counterfeit products. In many territories the Group is dependent upon the vigilance and responsiveness of law enforcement bodies whose priorities may differ from the Group's. They are also subject to budgetary constraints and prioritise their actions accordingly. Whilst the Group works closely with customs and other law enforcement bodies, ultimately the Group cannot direct their actions.

In key emerging markets, including China and the Middle East, Burberry is largely dependent upon third-party operators with the associated lack of direct control and transparency and as the Group moves into increasingly higher risk locations the operating and reputational risk increases

In a number of key emerging markets, Burberry operates through third-party franchisees. In particular, a third-party retail operation has been developed in China. The Group largely depends upon the expertise of these franchisees given its relative lack of experience in this region. During the year, the Group has strengthened its emerging markets team, and where appropriate has its own staff based within these operations who work closely with franchisees to further develop operational models to enable greater control and visibility.

The Group has established joint ventures in Japan, the Middle East (excluding Saudi Arabia) and India to collaborate with experienced operators in high-growth, under-penetrated markets and improve its ability to ensure the operations are managed in accordance with the Group's global standards.

Burberry is exposed to foreign currency fluctuations

Burberry derives a significant percentage of its profits from its Japanese licensing arrangements. As a consequence, the Group is exposed to a significant risk associated with the Yen to Sterling exchange rate. In addition, the Group is continuing to expand its operations in the United States and Europe as part of its strategy to accelerate retail expansion in key under-penetrated markets. As the Group's presence in the United States and Europe increases, it is exposed to an increased risk associated with the US Dollar to Sterling exchange rate and Euro to Sterling exchange rate.

The Group manages a significant proportion of the foreign currency exposures by the use of forward exchange contracts. Currency fluctuations affecting the Yen, Euro, US Dollar and other currencies will nevertheless affect results and profitability.

Burberry's operating results are subject to seasonal fluctuations

Burberry's business, particularly with respect to apparel, broadly operates on a seasonal basis (Spring/Summer and Autumn/Winter) and the Group has experienced, and expects to continue to experience, substantial seasonal fluctuations in sales and operating results. In particular, results vary based on the weather because of the large proportion of outerwear products Burberry offers and the effect of the weather on retail markets generally. As a result of these fluctuations, comparisons of sales and operating results between different periods within a single financial year are not necessarily meaningful. In addition, these comparisons cannot be relied on as indicators of the Group's future performance.

Burberry faces increasingly intense competition

Competition in the luxury goods sector has intensified in recent years and Burberry is faced with increasing competition in many of our product categories and markets. The Group competes with international luxury goods groups who control a number of luxury brands and may have greater financial resources and bargaining power with suppliers, wholesale accounts and landlords. If Burberry is unable to compete successfully, operating results and growth may be adversely impacted.

A significant incident such as a natural catastrophe, global pandemic or terrorist attack affecting one or more of the Group's key locations could significantly impact the operation of our businesses

In such circumstances, the uninterrupted operation of the business cannot be ensured, particularly in the short term. Business continuity plans are in place to mitigate but not eliminate the operational risks.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The following information is extracted from page 80 of the 2009/10 Annual Report and Accounts.

Each of the directors, whose names and functions are listed on page 61 confirms that, to the best of their knowledge:

·     the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and

·     the Directors' Report contained on page 62 includes a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that the Group faces which are contained on pages 48 to 51.

NOTE 28 RELATED PARTY TRANSACTIONS

The following information is extracted from page 123 of the 2009/10 Annual Report and Accounts.

Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note.  The related party transactions relate to total compensation paid to key management, who are defined as the Board of Directors and certain members of senior management, and a loan from a minority interest partner.

The total compensation paid to key management during the year was as follows:

	Year to 31 March 2010 £m	Year to 31 March 2009 £m
Salaries and short-term benefits	8.6	4.7
Post-employment benefits	0.3	0.4
Share based compensation	4.0	1.8
Total	12.9	6.9

The aggregate cost to the Group of the exercise of share options and awards to key management in the year to 31 March 2010 was £5.2m (2009: £1.5m).

During the year, Mitsui & Co Limited, a minority interest partner in Japan, provided a subsidiary company with a loan totalling £0.5m.  The loan is due to mature on 8 November 2010.  Interest is charged on this loan at the Japanese short-term prime rate plus 0.5%.

 

END

 

 

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