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Burberry Hit by Weak Luxury Demand in China

A tough economic climate in Hong Kong and mainland China is hurting luxury sales across the board, the company said.
Christopher Bailey, CEO and chief creative officer of Burberry, at the brand's spring 2016 show in September. Photo: Samir Hussein/Stringer

Christopher Bailey, CEO and chief creative officer of Burberry, at the brand's spring 2016 show in September. Photo: Samir Hussein/Stringer

For much of the past decade, China has been the luxury world's golden horse, sending sales and profits up to record highs while other fashion and retail businesses suffered from the aftershocks of a global economic recession. But those halcyon days may be drawing to a close.

Burberry released earnings numbers for the six months ending Sept. 30 on Thursday, and sales in Hong Kong and mainland China were not only weak — growing in the low single-digits in the first quarter — but they actually declined in the second. The company does not believe that was the result of weakening demand for Burberry products in particular, but a combination of macro factors that affected the region's luxury market as a whole, including the recent devaluation of the yuan, stock market volatility and slowing GDP growth, Fay Dodds, vice president of Burberry's investor relations team, said in a call with investors. Earlier this week, LVMH said that it, too, had been negatively impacted by China's stock market troubles, particularly at its flagship Louis Vuitton brand.

Burberry's total sales for the first half amounted to £1.1 billion (about $1.7 billion), up 2 percent year-over-year, with comparable sales up 1 percent. In addition to weakened demand in the Asia-Pacific market, sales in the US were "uneven," bringing total sales growth for the Americas region down to the low single digits. Sales were strong in Europe, Middle East, India and Africa, all of which saw growth in the double-digits. Japan had a nice first half, too, thanks to a new flagship store in Tokyo and 16 additional concessions. As expected, wholesale and licensing revenue continued to decline, down 3 percent and 18 percent respectively, as Burberry continues to take greater control over its own sales and other, previously licensed parts of its business — most notably beauty.

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Burberry believes a focus on its "key icons" during the holiday season, including the extension of its Heritage product line into navy and red colorways, the global rollout of the Scarf Bar, and the introduction of lightweight cashmere trench coats and more ponchos will help the company return to positive sales growth in the Asia-Pacific region in the second half of the year. Burberry also said that profits would not take a heavy hit for the year, as the company took significant measures to reduce costs last quarter — to the tune of £20 million — largely by eliminating current positions and opting not to refill others. Investors were not totally pleased, with shares falling more than 8 percent on Thursday.