Burberry Profit Setback Caps Luxury Industry’s Dismal Week

Burberry Group Plc reported weaker-than-expected sales and predicted earnings this year at the low end of estimates, sending its stock down the most in six months and capping a dismal week for the luxury-goods industry.

In a business climate that Chief Executive Officer Christopher Bailey described as “challenging,” sales in Hong Kong fell more than 20 percent for a third straight quarter. Tourists are spending less in Europe following terrorist attacks and demand remains uneven in the U.S., the company said. The shares slid as much as 8.1 percent.

Burberry’s comments add to a slew of glum news for the luxury-goods industry after LVMH’s revenue growth missed estimates and Prada posted its lowest annual profit in five years. The latest setback adds to pressure on Bailey, with analysts including Luca Solca at Exane BNP Paribas questioning whether he can lead the company effectively, while also being head designer.

Burberry’s outlook is “likely to be taken negatively for the whole luxury sector,” said Zuzanna Pusz, an analyst at Berenberg in London.

Burberry shares were down 7.5 percent to 1,244 pence at 9:53 a.m. in London, the steepest drop since October and the worst performer on the STOXX Europe 600 Index. LVMH, Richemont and Hermes International shares also declined in Europe.

Burberry said sales at its own stores turned negative in the fourth quarter, falling 5 percent on a comparable basis. Retail revenue was unchanged in the prior three months.

“The most significant shift in trends that we saw Q3 into Q4 was in continental Europe where we saw a significant decline in tourists,” particularly from China, Burberry Chief Financial Officer Carol Fairweather said on a call with reporters.

Pretax profit estimates for this year start at about 405 million pounds, Fairweather said. This excludes benefits from Burberry’s “productivity and efficiency agenda,” which the company will present next month. Wholesale revenue will drop about 10 percent in the first half of this year, the company said.

The trench coat maker has been particularly affected by sliding demand in Hong Kong as it only has a small number of stores in Japan, where Chinese shoppers have shifted spending to take advantage of a weak yen. Sales in Burberry’s Japanese stores more than doubled last year, though the country accounts for a little more than 2 percent of overall sales, Fairweather said.

Burberry’s difficulties have caused some analysts and investors to question whether Bailey can lead the company effectively, while also being head designer.

“Christopher has two choices: either he spends more time with the product and design team, or he reinforces the creative leadership by hiring more high-profile talent — and moves closer to being a CEO 100 percent,” Solca said. “I’m not sure holding a dual responsibility at such a difficult juncture is the best option for him and for Burberry.”

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