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May 18, 2016

Burberry Plans to Cut Costs, Change Product Lines

by Jharonne Martis.

Burberry Group plc (BRBY.L) announced on May 18 that it would shrink its product range and focus more on handbags after its annual profit dropped in a tough market that shows no sign of improving this year.

The company’s stock has lost more than a third of its market value over the past 12 months, and it said it plans to cut costs by at least 100 million pounds ($144 million) by 2019.

The company slightly beat expectations on revenue, but despite existing cost cutting, net income missed expectations and came in very weak. In a news release, the company blamed a weak luxury environment and said it is making aggressive changes to the brand.

Chinese consumers have been enthusiastic luxury shoppers and while Burberry is popular among Chinese customers, its merchandise is not as resilient as other luxury makers such LVMH, Hermes and Gucci. However, Burberry is seeing strength in accessories and beauty products through the Sephora channel. There is still a lot of weakness within the brand itself.

Hong Kong, in particular, is not a strong market now for Burberry, which posted a recent same store sales (SSS) decline of -1.0%. If Hong Kong and Macao are excluded, then SSS rose by 3%. Hong Kong used to be the jetsetter destination for shoppers looking for expensive bags. Now they are going to South Korea and Japan to take advantage of weaker yen. Burberry is opening flagships in Seoul and Tokyo, which is a smart move.

Burberry is not the only retailer suffering. Hong Kong is a big market for other luxury names, but real estate costs are very high. Burberry is doing massive cost cutting, but also says it will invest a lot of money in digital and omni-channel selling, which is not cheap. In fact, it’s the biggest expense for retailers.

Analysts polled by Thomson Reuters are very bearish on the stock right now. Looking at the next four quarters, earnings are projected to be flat.

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