Burberry given a beating on luxury fashion strategy shift

Investors checked out of Burberry
Investors checked out of Burberry

Burberry shares were dealt their biggest beating for five years on Thursday after investors balked at a new strategy to elevate the brand to become a “firmly luxury fashion” business.

Marco Gobbetti, who officially became chief executive in July, told investors that Burberry would “sharpen” its brand and boost profit margins to be in line with Gucci and Hermes by selling more expensive leather goods, such as its £1,295 Bridle handbags.

However, the City has been unnerved by the multi-million pound spending Mr Gobbetti’s brand overhaul will require. Burberry said that it expected to spend between £150m and £160m next year and as much as £210m a year over the “medium term”.

The company said it was still ploughing ahead with its cost-cutting plan to save £120m over the next five years, but those savings will go towards its hefty investment programme that will take at least two years to generate “sustainable” returns. Burberry shares tanked on the news, closing down by 198p, or 10pc, to £17.87.

“A lot of time and patience is required from investors,” commented Rogerio Fujimori, RBC analyst.

Mr Gobbetti, who joined from Celine, announced that Burberry would “re-energise” its business by refurbishing stores to “enhance our luxury service” and reducing some of its “non-luxury” wholesale and retail locations. Burberry said it will face a £15m hit linked to store closures without revealing how many shops it will shut.

The strategy shift has spooked shareholders who have witnessed rival brand Mulberry’s ill-fated move to ratchet up its handbag prices, which ended up alienating customers and destroying growth. Luca Solca, head luxury analyst at Exane BNP Paribas, said the “metamorphosis isn’t necessarily straightforward” because Burberry’s reputation was built on trench coats rather than high-end goods. Mr Gobbetti stressed that Burberry’s “evolution” was coming from a “position of strength”.

Burberry's chief financial officer Julie Brown and chief executive Marco Gobbetti

“We are already playing in the luxury space, this is not a movement upwards because the brand is already not that accessible… Our trench coats are £2,000, our leather handbags are not $400 (£305), they are $1,000 (£762)”, he said before adding that luxury rivals could charge 50pc more for a polo shirt.

Burberry’s shift in direction comes just a week after Christopher Bailey, creative director, shocked the fashion world by announcing his “transition” from Burberry after 17 years at the forefront of the business.

Mr Gobbetti said the search to replace Mr Bailey would “impact the phasing” of his strategy. Analysts questioned how Burberry could announce a brand identity shift when there was a looming creative vacuum.

The new Burberry boss would not be drawn on speculation that Phoebe Philo, Celine’s designer, was a front-runner for the role. “I think finding someone with the same creative vision as Christopher Bailey is impossible but it will be a question of finding someone with the creative vision for Burberry’s next decade,” said Mr Gobbetti.

Burberry’s strategy update came alongside first-half results which revealed a 26pc rise in pre-tax profits to £128m and a 4pc increase in sales to £1.3bn.