Interim Results

RNS Number : 5969C

Burberry Group PLC

17 November 2009

 



17 November 2009

Burberry Group plc

Interim results 

for the six months ended 30 September 2009

Burberry Group plc, the global luxury company, today announces its unaudited results for the six months ended 30 September 2009. 

Highlights 

●	Solid business performance
	○	Total revenue of £572m (2008: £539m)
	○	Comparable store sales growth of 2% (Q2: 5%)
	○	Adjusted profit before tax of £83m (2008: £95m)
		-	Improved Q2 retail and gross margin performance
	○	Profit before tax of £78m (2008: £97m)
●	Strong financial position at 30 September
	○	Net cash of £56m (2008: net debt of £114m)
	○	Tight management of inventory
		-	Down 40% year-on-year at constant FX, to £215m
	○	Interim dividend increased by 4% to 3.50p
●	Good progress on key growth strategies
	○	Non-apparel 34% of revenue, up from 32% in H1 2008
	○	Childrenswear 5% of revenue, up from 3%
	○	Retail 54% of revenue, up from 45%
	○	Emerging Markets 10% of revenue, up from 9%
●	Further progress on corporate initiatives
	○	Japanese apparel licence amended to reduce term by five years and increase royalty income
	○	Joint venture in India proposed, subject to government approval
	○	Global cost efficiency programme fully implemented, resulting in full year savings of about £50m

Angela Ahrendts, Chief Executive Officer, commented:

"Burberry delivered a solid first half performance, reflecting the strength of the brand, business and team. We enter the second half confident in our core strategies, capitalising on product, region, channel and operational opportunities. The Board has increased the dividend to reflect the momentum in the business."

 "Adjusted" refers to profitability measures (pre and post tax) calculated excluding:

1. Restructuring costs of £4.2m (2008: nil) relating to the Group's cost efficiency programme.

2. Credit of £1.7m in 2008 representing negative goodwill on the formation of the Burberry Middle East joint venture.

3. Impact of prior year tax adjustment in 2008. 

Underlying change is calculated at constant exchange rates.  

Certain financial data within this announcement have been rounded.

Enquiries

Burberry		020 3367 3524
Stacey Cartwright	EVP, Chief Financial Officer
Fay Dodds	Director of Investor Relations

Brunswick		020 7404 5959
David Yelland
Laura Cummings

There will be a presentation today at 9am (UK time) to investors and analysts at the Merrill Lynch Financial Centre, 2 King Edward Street, London, EC1A 1HQ. The presentation can be viewed live on the Burberry website (www.burberryplc.com) and can also be accessed live via a dial-in facility on 44 (0)20 7081 7194. The supporting slides and an indexed replay will also be available on the website later in the day.

Burberry will update on trading on 19 January 2010 when it will issue its Interim Management Statement in respect of the Third Quarter.

Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from any expected future results in forward-looking statements.  

This announcement does not constitute an invitation to underwrite, subscribe for or otherwise acquire or dispose of any Burberry Group plc shares. Past performance is not a guide to future performance and persons needing advice should consult an independent financial adviser.

Group financial highlights

Revenue of £572m, up 6% reported, down 5% underlying excluding a £60m benefit from exchange rates

Adjusted retail/wholesale operating margin of 9.1% (2008: 12.9%). Gross margin down only 30 basis points; operating expenses up as guided; consistent with revenue shift to retail from wholesale which will continue in H2

Adjusted profit before tax of £82.6m (2008: £95.3m), including a £6.7m benefit from exchange rates

Reported profit before tax of £78.4m (2008: £97.0m), after balance of restructuring charges

Tax rate of 27% estimated for the full year

Adjusted diluted EPS of 13.6p; reported diluted EPS of 12.9p

Interim dividend increased by 4% to 3.50p, reflecting strong financial position and momentum in business 

Net cash of £56m at 30 September 2009 (2008: net debt of £114m), with working capital inflow of £15m in first half (2008: £76m outflow) 

	Six months to 30 September			% change
£ million	2009	2008		Reported	underlying
Revenue	572.4	539.1		6	(5)
Cost of sales	(229.7)	(216.0)		(6)
Gross margin	342.7	323.1		6
Adjusted operating expenses	(256.4)	(224.7)		(14)
Adjusted operating profit	86.3	98.4		(12)	(19)
Restructuring costs	(4.2)	-
Negative goodwill	-	1.7
Operating profit	82.1	100.1
Net finance charge	(3.7)	(3.1)
Profit before taxation	78.4	97.0
Taxation	(21.1)	(22.2)
Minority interests	(0.5)	-
Attributable profit	56.8	74.8
Adjusted EPS (pence)	13.6	15.3
EPS (pence)	12.9	17.0
Weighted average number of ordinary shares (millions)	439.2	439.9

EPS is calculated on a diluted basis

INTERIM MANAGEMENT REPORT 

During the first half, Burberry made further progress against its original five key strategies in what remained challenging markets.

Leveraging the franchise

• Burberry continued to shift marketing investment to drive brand momentum.  Digital marketing initiatives leveraged seasonal advertising imagery, PR and events, such as the Spring/Summer 2010 runway show, across a range of platforms to access new customers and reinforce the brand's position with existing customers.  

• Burberry brought greater definition to its brand segments, through relabelling the tailored and casual components of the women's and men's apparel lines. From Spring/Summer 2010, the Burberry London label and the Burberry Brit label will designate, respectively, the more formal and more casual parts of the collection. The first freestanding concept stores for these labels will open in New York this month. 

• Childrenswear revenue increased nearly 50% underlying during the half, in line with the brand's opportunities in this category.

• The amendment to the apparel licence in Japan, announced in October 2009, increases Burberry's profitability in the short term. With the licence now expiring in 2015 (previously 2020), Burberry is better positioned to optimise its presence in Japan and the high growth Asian region over the intermediate term.   

Intensifying non-apparel development

• Non-apparel was the strongest performing major division in the first half, contributing 34% of retail/wholesale revenue, up from 32% a year ago.  

• Continued innovation drove growth in non-apparel, especially in large leather goods (which now account for 50% of non-apparel sales), small leather goods and soft accessories.  Replenishment and the ability to fulfil reorders quickly also contributed to growth.

• The Japanese non-apparel joint venture is fully operational, with the new Tokyo headquarters opened this month and the newly refurbished Omotesando, Tokyo store re-opened last month. Although Japan remains a difficult market for luxury goods, Burberry has an opportunity to gain share in non-apparel as this is the first time the global collection is available in a significant way inside Japan.

Accelerating retail-led growth

• Retail accounted for 54% of sales in the first half, up from 45% a year ago.

• Burberry continued to improve the quality of its retail portfolio. During the first half, 23 directly-operated stores and concessions were opened, while major stores including Bond Street, London, 57th Street, New York and Ocean Centre, Hong Kong were renovated.  

• The Burberry Experience, the sales and service programme, was extended to stores in Europe, Asia and the Americas in the first half, to be followed by the Middle East in the second half.  Laptops linking to the e-commerce site are being introduced into 60 stores to elevate customer service. 

Investing in under-penetrated markets

• Sales in Emerging Markets accounted for 10% of sales in the first half - up from 9% in the same period last year.  There are over 90 Burberry stores in Emerging Markets, the majority of which are currently operated under franchise. 

• China continued to perform strongly, with 44 franchise stores now, following seven openings in the first half, including the first standalone childrenswear store in this market.

• A joint venture is in the process of being established in India, subject to government approval, and new franchise agreements have been signed in Lebanon and Mongolia, to increase further the brand's presence in high growth Emerging Markets.  

• There is continued investment in the Americas across all channels, following the high demographic retail cluster strategy with additional openings in Toronto, for example; and further real estate gains in wholesale partners, including five shop-in-shops in New York.

Pursuing operational excellence

• Burberry continued to drive benefits in sourcing, logistics and distribution.

• The SAP conversion process is well underway in Asia.

• There were further process improvements in assortment planning and replenishment, facilitated by better data from SAP and investment in teams to optimise this.

• The global cost efficiency programme was fully implemented, resulting in full year savings of about £50m.  Along with the efficiencies announced in January 2009 (including the closure of Thomas Burberry, the rationalisation of internal manufacturing and driving benefits from investments made in supply chain, IT and infrastructure), six underperforming stores were closed in the period.  Total headcount has been reduced by over 1,000.  Benefits in the first half amounted to about £22m.

Revenue analysis

Total revenue in the first half was £572m, an increase of 6% reported and a decline of 5% underlying.  

Revenue by channel of distribution

	Six months to 30 September			% change
£ million	2009	2008		reported	underlying
Retail	311.6	245.0		27	14
Wholesale	216.1	254.4		(15)	(23)
Licensing	44.7	39.7		13	(6)
Total	572.4	539.1		6	(5)

The Burberry Middle East joint venture was formed on 30 September 2008. This transaction marginally increased total underlying sales in the half (slight positive impact in retail; slight negative impact in wholesale)

Retail 

Retail sales, which accounted for 54% of total revenue in the first half, increased by 14% on an underlying basis (up 27% reported).  Within this, comparable store sales increased by 2% (or up 4% excluding Spain).  New space and Burberry Middle East contributed 8% and 4% respectively to the 14% growth.

Total comparable store sales accelerated in the half (Q1: flat; Q2: +5%), due primarily to a positive response from consumers to the Autumn/Winter 2009 collections. In mainline stores, footfall improved throughout the period and average selling prices were marginally higher year-on-year, helped by outperformance from non-apparel, especially handbags, as well as casual outerwear.  By region, Europe and Asia again showed double-digit comparable store sales growth, while the United States and Spain were down double-digit.  E-commerce, which is now live in over 25 countries, grew by about 50% in the period, albeit from a small base.

Wholesale 

Wholesale revenue for the first half of the year declined by 23% on an underlying basis (down 15% reported). This is slightly ahead of guidance of down about 25% given in April 2009.

Of the underlying decline, 10% resulted, as planned, from Burberry's own actions. These included the closure of Thomas Burberry as part of the global cost efficiency programme, the continued planned rationalisation of many small specialty accounts in Europe and the conversion of Burberry Middle East from wholesale to retail.  

The balance (-13%) reflects lower shipments of the Autumn/Winter 2009 collections in all regions of the world. These ranges were ordered from late November 2008, which was the first opportunity for wholesale customers to reduce their inventory levels for all brands following the economic slowdown.  Excluding Spain, the weakest market, the decline was 10% rather than 13%.

In conjunction with local franchisees, Burberry opened a net nine stores during the half, bringing the total number of franchise stores at 30 September 2009 to 90.  The openings included two in Bahrain and seven in China, of which one was a freestanding childrenswear store in Beijing.  

Licensing 

Total licensing revenue in the first half decreased by 6% on an underlying basis and was up 13% on a reported basis, reflecting primarily the strength of the yen, which is largely hedged 12 months forward. 

In October 2009, Burberry announced an amendment to its apparel licence with Sanyo Shokai Ltd and Mitsui & Co., Ltd in Japan. The main change was that the licence agreement now terminates in June 2015 (previously 2020) with no right of renewal. Burberry will also receive higher royalty payments than previously planned and enhanced performance criteria based on higher levels of production have been introduced from 1 January 2011 until the expiry of the licence agreement.  

For the half, with this amendment, Japanese royalty income was down only mid-single digits year-on-year in what remains a challenging environment for department stores, the licensees' main channel to market.  Growth from global product licences, especially fragrances, was more than offset by the planned termination of local menswear licences.  Notice has been served to terminate the last two remaining licences, allowing Burberry to develop and offer a fully cohesive mens' tailored or London collection for Autumn/Winter 2010.

Burberry continues to work more closely with its global licensees to capitalise on its brand momentum in fragrance, eyewear and timepieces.  New product initiatives include the relaunch of the Burberry Brit fragrance available now in-store to support the segmentation of the Brit collection, as well as the launch of a Burberry Sport fragrance for Spring/Summer 2010.

Retail/wholesale revenue by destination 

	Six months to 30 September			% change
£ million	2009	2008		reported	underlying
Europe*	194.8	177.7		10	2
Spain	49.1	70.7		(31)	(37)
Americas#	138.6	128.7		8	(9)
Asia Pacific	117.2	103.2		14	3
Rest of world#	28.0	19.1		47	36
Total retail/wholesale	527.7	499.4		6	(5)

* Excluding Spain

# Central and South America have been reclassified from Rest of world to Americas

Europe (37% of revenue)

Revenue in the first half in Europe increased by 2% on an underlying basis, up 10% reported.

Retail, which accounted for over half of the region's sales, increased strongly, driven by exceptional growth in the London stores, which have benefited from favourable currency and increased tourism since late 2008.  A new mainline store was opened in Amsterdam, three concessions were added in premier department stores, while two stores were closed as part of the cost efficiency programme. Wholesale declined double-digit in Europe. This was impacted in part by Burberry's decision to reduce the number of specialty accounts it sells to by over 200. This will also impact the second half. 

Spain (9% of revenue) 

Revenue in Spain was down 37% underlying (down 31% reported), with over half of the decline reflecting the closure of Thomas Burberry.  

The economic environment in Spain remained extremely challenging.  Retail, which is over half of Spain's revenue, declined double-digit on a comparable basis. Excluding Thomas Burberry, wholesale was down by around 30%, as the number of domestic independent retail customers again declined by more than 10%.  Wholesale is also expected to remain weak in the second half.

During the first half, as part of its global cost efficiency programme, Burberry significantly reduced the cost base in Spain, with headcount down by over 300 - almost halving the workforce in the Spanish headquarters.  The focus in Spain remains on improving the collections, driving local efficiencies and working ever more closely with the teams in London.

Americas (26% of revenue)

Revenue in the Americas declined 9% underlying, up 8% reported, in a period impacted by logistics issues associated with SAP conversion.

Retail, which contributed about 70% of revenue in the first half, saw a double-digit decline in comparable store sales, with some improvement towards the end of the period. Three mainline stores were opened in the half, including the first in Toronto, as Canada is a focus for growth through both the retail and wholesale channels. In the second half, Burberry expects to open three more stores - a flagship in Toronto and two freestanding concept stores at 444 Madison Avenue, the Americas headquarters - one Burberry London and the other Burberry Brit. These two stores will demonstrate a clearer segmentation of the collections to both consumers and wholesale customers.

Wholesale revenue declined double-digit in the first half, reflecting a cautious buy by major department store customers.  For the second half, US wholesale shows relative strength, driven by non-apparel and menswear, the latter helped by licence terminations.  Burberry is also gaining real estate with key customers, as the brand continues to outperform peers in core categories and expand new businesses such as childrenswear.  

Asia Pacific (22% of revenue)

Revenue in Asia Pacific increased by 3% on an underlying basis, up 14% reported.

Retail, which was two-thirds of Asian revenue in the half, delivered double-digit comparable store sales growth. This was led again by Korea, Burberry's largest Asian retail market outside Japan, where currency movements encouraged greater spending in Korea.  Hong Kong, the second largest market in the region, also performed well, especially in the second quarter. Five mainline stores were opened in the first half, including the region's first flagship in Singapore (Ion Orchard), a further childrenswear store in Hong Kong and two additional stores in Australia - a small but high growth market for Burberry. 

Wholesale revenue declined double-digit in the first half, with a fall in sales to travel retail customers throughout the region partly offset by continuing growth in China, where 44 stores are currently operated under franchise.  The Burberry brand continues to perform well in China, with strong double-digit comparable store sales growth in the half.  

The non-apparel joint venture in Japan is now fully operational, with a strong, local management team.  The flagship store in Omotesando, Tokyo (previously run under franchise) has recently been renovated to showcase the global non-apparel collection.  Up to ten shop-in-shops with luxury adjacencies will be open for Spring 2010.

Operating profit analysis

Total operating profit

	Six months to 30 September			% change
£ million	2009	2008		reported	underlying
Retail/wholesale	48.0	64.4		(25)	(24)
Licensing	38.3	34.0		13	(10)
Adjusted operating profit	86.3	98.4		(12)	(19)
Adjusted operating margin	15.1%	18.3%
Restructuring costs	(4.2)	-
Negative goodwill	-	1.7
Operating profit	82.1	100.1		(18)

Adjusted operating profit was £86.3m in the first half, resulting in a group operating margin of 15.1%.  Restructuring costs of £4.2m were incurred, being the final charge relating to the global cost efficiency programme announced in January 2009 (£54.9m was charged in the second half of the last financial year).

Retail/wholesale adjusted operating profit

	Six months to 30 September			% change
£ million	2009	2008		reported
Revenue	527.7	499.4		6
Cost of sales	(229.7)	(216.0)		(6)
Gross margin	298.0	283.4		5
Gross margin %	56.5%	56.8%
Operating expenses	(250.0)	(219.0)		(14)
Adjusted operating profit	48.0	64.4		(25)
Operating expenses as a % of sales	47.4%	43.9%
Adjusted operating margin	9.1%	12.9%

Retail/wholesale adjusted operating profit was £48.0m in the half, resulting in a 9.1% margin. Gross margin was better than expected, reflecting stronger full price sales. Operating expenses as a percentage of sales increased, as indicated at the preliminary results in May 2009. Retail was 54% of sales in the first half compared to 45% in the same period last year. This substantial shift in revenue mix increased gross margin but adversely impacted both the operating expense to sales ratio and the operating margin.

Gross margin  

Gross margin in the first half was down only 30 basis points, better than expected, due primarily to stronger full price sales towards the end of the period.

Year-on-year, the major factors impacting the gross margin percentage were savings from the cost efficiency programme (about £10m,  equivalent to about 200 basis points); the switch from wholesale to retail which is a higher gross margin channel (contributing around another 100 basis points); and a favourable exchange rate.  These factors were offset by higher markdowns in the first quarter compared to the same period last year. 

For the second half, Burberry continues to expect an improvement in the gross margin, helped by the shift to retail, continuing cost efficiencies and higher full price sell-through, given lower procurement of inventory for the period. 

Operating expenses 

At the preliminary results in May 2009, Burberry stated that it expected operating expenses as a percentage of sales to increase in 2009/10.

In the first half, operating expenses increased by £31m or 350 basis points as a percentage of sales to 47.4%. Savings of approximately £12m were realised from the global cost efficiency programme.  Exchange rate movements added £20m to costs and the shift in revenue mix to retail with new space and new ventures also added about £20m. 

For the full year, Burberry expects retail/wholesale operating expenses as a percentage of sales to remain in the high forties. 

Licensing operating profit

	Six months to 30  September			Six months to 30 September 2009
£ million	2009	2008		At constant FX
Revenue	44.7	39.7		37.2
Cost of sales	-	-		-
Gross margin	44.7	39.7		37.2
Gross margin %	100%	100%		100%
Operating expenses	(6.4)	(5.7)		(6.7)
Operating profit	38.3	34.0		30.5
Operating margin	85.7%	85.6%

Licensing revenue declined by 6% on an underlying basis and the operating margin was broadly flat at 85.7%.

Taxation 

The effective rate of tax on adjusted profit for the full year 2009/10 is estimated to be 27%, which is the rate applied in H1 2009 (2008: 29.5%).  The actual tax rate on reported profits for H1 2008 (22.9%) included a benefit from a prior year adjustment.

Cash flow and net debt 

Net cash at 30 September 2009 was £56.3m, compared to £7.6m at 31 March 2009 and net debt of £114.3m at 30 September 2008.  The significant improvement in the last twelve months results primarily from lower inventory (£215m at 30 September 2009 compared to £331m a year ago). This is equivalent to a 40% reduction at constant exchange rates (despite a 12% increase in average selling space) and reflects lower procurement for the current season and a reduction in aged inventory.  

In the first half, major cash flow items included a working capital inflow of £15m (2008: £76m outflow), capital expenditure lower at £33m (2008: £40m), depreciation higher at £24m (2008: £20m), with interest, tax and dividends broadly unchanged year-on-year at £48m.

Capital expenditure for the year to 31 March 2010 is now expected to be about £70m, including £3m on the Japanese non-apparel joint venture, compared to the expected depreciation charge of about £50m. 

The interest charge was £3.7m, reflecting low interest rates on cash balances, fees relating to early repayment of borrowings and fees incurred on the £260m banking facilities. Burberry expects a full year interest charge of about £5m.

Outlook 

The following revenue guidance is consistent with that given in October 2009.

Retail

For the full year, average selling space is expected to increase by between 8-10%, after adjusting for around a 1.5% negative impact from those stores closed as part of the global cost efficiency programme.  Burberry plans to open around 15 additional mainline stores in the full year, biased towards Asia and the Americas.  

Average selling space increased by 12% in the first half, with about 6-7% planned for the second half (net of the impact of the stores closed in the first half).

Wholesale

For the second half, Burberry expects wholesale revenue to be down by around 15% at constant currency. Of this, about half comes from Burberry's own actions, including the second half impact of closing Thomas Burberry and certain specialty accounts in Europe. The balance of the decline comes mainly from ongoing weakness in Spain.  Demand for the global collection is planned to be broadly flat year-on-year.

Licensing

Reflecting the positive impact of the amendment to the Japanese apparel licence agreement, Burberry expects underlying licensing revenue for the full year to decline by between 5 and 10%. Reported revenue is expected to grow year-on-year due to currency benefits.

Principal risks and uncertainties 

The principal risks and uncertainties affecting the business activities of the Group are much in line with those detailed on pages 45 to 47 of the Burberry Group plc Annual Report 2008/09.  On an ongoing basis throughout the period, the Group carried out a formal process to identify, evaluate and manage significant risks faced by the Group.  The global economic downturn remains one of the principal risks and, aside from affecting consumers' purchases of luxury items, may have other effects such as changes in the fiscal and regulatory policies in the countries where the Group conducts its business.  In the view of the directors and except as described here, there has been no material change in these factors in respect of the remaining six months of the financial year.

APPENDIX

Retail/wholesale revenue by product category 

	Six months to 30 September			% change
£ million	2009	2008		reported	underlying
Womenswear	187.5	188.2		-	(10)
Menswear	131.5	136.7		(4)	(14)
Non-apparel	181.6	157.0		16	4
Childrenswear/other	27.1	17.5		55	40
Total retail/wholesale	527.7	499.4		6	(5)

Store portfolio

	Directly-operated stores
	Mainline stores	Concessions	Outlets	Total	Franchise stores
At 31 March 2009	119	253	47	419	81
Additions	8	13	1	22	11
Closures	(6)	(11)	(1)	(18)	(1)
Transfers	1	-	-	1	(1)
At 30 September 2009	122	255	47	424	90

Store portfolio by region 

	Directly-operated stores
At 30 September 2009	Mainline stores	Concessions	Outlets	Total	Franchise stores
Europe*	31	23	16	70	13
Spain	4	128	5	137	-
Americas#	59	-	22	81	3
Asia Pacific	18	104	3	125	60
Rest of world	10	-	1	11	14
Total	122	255	47	424	90

* Excluding Spain

# Three franchise stores in the Americas are in Mexico

Sales to franchise stores reported in wholesale revenue

Retail net selling square footage at period end

	000s square feet
At 31 March 2007	650
At 31 March 2008	740
At 30 September 2008	780
At 31 March 2009	845
At 30 September 2009	870

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END

 

 

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