Burberry Group (NASDAQOTH: BURBY), the 160-year-old high-end clothing brand, has been struggling to hold market share amid falling sales in its most important regions. While the company has made news by investing in new product categories and cleaner retail channels in the past few years, its most recent financial report shows why the struggles of this traditional luxury brand are proving hard to overcome.
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Image source: Burberry Group.
Burberry stock's challenges
Shares of Burberry stock have continued to fall from their high of around $29 in early 2015, as the company has struggled with declining sales.The British-based company received a major boost from the declining British pound following Brexit in the summer of 2016, since international sales then translated much higher. Yet that hasn't been enough to offset the sharp declines elsewhere, such as in the U.S. and China, some of its most important markets. For the six months ended Sept. 30, Burberry reported wholesale revenue down 14% overall year over year, with a 10% drop in Hong Kong and whopping 25% decline in the United States.
Burberry, along with others in its category, has faced increased issues with discounted products when its luxury-priced items are marked down in department stores because of competition from lower-cost alternatives. To try to combat the need for discounting, Burberry has started pulling its products out of some mid-tier department stores in the U.S. to focus only on the higher-end market. In Asia, an economic slowdown there is being blamed for sales drops, including less travel to Hong Kong, which has been one of the company's most lucrative regions.
3 areas to watch going forward
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For Burberry to regain some ground and be a good investment going forward, there would certainly need to be some changes to its operations. Now it looks as if the company is making some changes -- here's what to watch.
1. Potential Coach merger. In late October, rumors started circling that Burberry and Coach (NYSE: COH) were in talks for a potential $20 billion merger. This combined company would then be one of the biggest the industry, and with a wide reach globally. Both stocks reacted to the rumors right away, as investors seemed to like the idea of potential synergies and competitive advantages of the combined company.Analysts at Wells Fargo wrote in a note to investors following the rumor that regional advantages, as well as the portfolio of products, would benefit the two companies if they combined.
2. Cost-cutting plan. Burberry announced in May that it was attempting to deal with sales pressure by instituting a strict cost-cutting plan to keep earnings rising. The company pledged to cut 100 million pounds (about $138 million as of this writing) annualized by 2019. That would be about 10% of Burberry's operating expenses, excluding fixed rent and depreciation. The group also announced a share buyback plan for up to of up to 150 million pounds (about $208 million)starting in fiscal 2017.
Burberry CEO Christopher Bailey, who will step down in 2017. Image source: Burberry Group
3. Top management reorganization. Burberry management has announced quite a few changes to top management, including CEO Christopher Bailey's plans to step down in 2017. Bailey was head of design before he moved to the role of CEO in 2014. He will be replaced by Marco Gobbetti, chief executive of the brandCeline, and will return to his previous post.
Management and analysts both have said that Gobbetti is a great operations person, so the move will allow Bailey to focus full-time on making sure Burberry's design is as good as it should be, while Gobbetti will deal with the business.Other than his stepping down, CFO CarolFairweather will step down in January, followed by COOJohn Smith later in the year.
Is Burberry stock a buy?
These points look good for Burberry. The company is also looking to upgrade its online revenue with a revamped Burberry.com in September.Still, the company is competing in an increasingly full retail market against modern companies that are proving much better at solving the retail distribution puzzle.
Burberry does hold a relatively high dividend yield of 2.7%, which, coupled with its relatively low P/E of 21, could make this an attractive buy while waiting for a turnaround to take hold. If the company can make good on its cost-cutting initiative, then it could keep earnings stable while new management and a potential merger could yield longer-term results. However, that's speculative -- it's probably worth waiting on the sidelines to see how some of these changes shake out.
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Seth McNew has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.