Takeover rumours swirl as Burberry feels the chill

When the new boss of Burberry lays out the plan for the beleaguered luxury retailer on Thursday, he will do so against the backdrop of a downturn in China’s luxury sector, a rumoured takeover bid from an Italian rival and a cost-cutting drive.
Joshua Schulman, the former head of Michael Kors and Coach, was appointed chief executive of Burberry in July and has been given the job of reviving the retailer’s flagging fortunes.
It has struggled over the past year following a slowdown in demand for luxury goods, amid a wider decline in consumer spending and a faltering Chinese economy. The downturn of the luxury sector in China has weighed on brands across the industry, including Richemont, the owner of Cartier, which reported a 27 per cent fall in sales in the country in the six months to September 30.
Piral Dadhania, an analyst at RBC Capital Markets, said fashion brands in so-called soft luxury — which covers upmarket consumer goods including clothing, cosmetics and accessories — are “normally the ones which suffer more when the luxury sector is under pressure. This typically correlates with lower brand positioning and/or higher apparel mix, such as Burberry in this cycle.”
Burberry’s problems extend far beyond the sector slowdown. The brand has been trying to revive its fortunes for years under different leaders. It has suffered particularly badly this year, however, having issued three profit warnings since January and ousted Jonathan Akeroyd as chief executive in July.
In his two-and-a-half-year stint, Akeroyd tried to move Burberry from mid-market to upmarket. He also wanted to boost the company’s finances by selling more high-margin accessories such as bags and scarves. That affected how the brand was priced and perceived but did not resonate with customers who looked to sector competitors Prada and Hermès within that category.
Burberry, known for its outerwear with signature checks that date back a hundred years, announced in July that it had suspended its dividend and 400 UK jobs would go in a cost-cutting drive. Shares in the retailer have fallen more than 40 per cent since the start of the year, resulting in Burberry being demoted from the FTSE 100 in September and leaving it with a market cap of £3.12 billion.
The retailer is expected to report first-half revenues of £1.08 billion, according to average consensus estimates. Analysts have also forecast that the British brand will report an adjusted operating loss of £45 million in the six months to September 30, compared with last year’s first-half profit of £225 million.
It has also become subject to takeover rumours after the specialist fashion website Miss Tweed suggested last week that the Italian luxury group Moncler might be considering a bid for Burberry with the aim of creating an “outdoor specialist giant”.
Staff at one of Burberry’s London shops have been told about the potential takeover by the Milan-based business, The Mail on Sunday reported, quoting a source saying that the brand has paused talks with business affiliates who sell its merchandise until more details emerge about the bid.
“Moncler reiterates that it does not comment on unsubstantiated rumours,” the Italian company said.
Analysts have previously suggested that Burberry could be a takeover target for private equity, or for American “accessible luxury” companies. Despite its recent performance and a slowdown in the wider luxury sector it remains an attractive prospect thanks to its 168-year-old heritage status.
The brand has, in Schulman, enlisted an American with a background in affordable luxury to lead the business. When Schulman presents the interim results it will be the first time that he has addressed the financial community on Burberry. Investors and analysts will be waiting for him to provide a strategic update on his vision for the direction of the business.
Outerwear, which makes up about 30 per cent of Burberry’s revenues, is expected to be an area of greater focus, Dadhania said.
“We think Burberry’s strategy will [reduce focus] to some extent on leather goods, which hasn’t worked for a number of years under various strategies, even though in theory its profitability is attractive, and refocus on outerwear and accessories where Burberry has heritage and authenticity, and a category which is arguably less competitive,” he said.
“The risk factors that will need addressing in time include right-sizing Burberry’s outlet business, which is not an insignificant portion of revenues and profit.
“If Burberry intends to maintain its brand elevation strategy, which they have been working on in the past few years, they will have to lower the outlet mix to some extent.”
The company is expected to present relatively downbeat financial figures but the market will be looking for causes for optimism from a strategic shift on Thursday.