Burberry Shares Dive, Pointing to Scale of CEO's Task -- 3rd Update

Burberry Group PLC's reliance on struggling department stores in the U.S. has hurt sales and its longer-term outlook, helping to send shares of the British fashion house tumbling.

Burberry reported falling revenue in the U.S., its biggest market, for the six months to Sept. 30, and said it doesn't forecast global sales and margin growth until fiscal 2021. That dire warning coincides with fresh uncertainty about Burberry's strategic direction.

Newly appointed Chief Executive Marco Gobbetti is looking for a creative chief to replace Christopher Bailey, who last week said he would step down in March, after 17 years in the role. Meanwhile, the U.S. is shaping up to be one of the toughest problems for Mr. Gobbetti, who took the reins this summer.

The U.S. accounts for more than a fifth of Burberry's global revenue. It makes about 30% of that by selling to retailers like department stores and outlets. That's a far higher percentage than at rivals like Prada SpA, and Kering Sa-owned Gucci, and Hermès International SCA.

Burberry has long complained about department store markdowns and poor product placement. More recently, e-commerce has sapped malls, department stores and other brick-and-mortar outlets of foot traffic, sending sales hurtling downward.

Burberry said both domestic and tourist spending in the Americas remains depressed. "Clearly the U.S. remains quite a challenging market overall, " said Chief Financial Officer Julie Brown.

Burberry warned that for fiscal 2019 and 2020, revenue and operating margin would be broadly flat, mostly due to costs related to restructuring and to its effort to scale back its presence in what it call non-luxury locations. Only in fiscal 2021 does Mr. Gobbetti now expect an uptick.

Shares fell as much 13% in early London trading Thursday, before recovering somewhat and closing down 10%.

Mr. Gobbetti -- whom Burberry plucked from Celine, a small, ultra-luxury brand owned by LVMH Moët Hennessy Louis Vuitton SE -- said Thursday his fix for Burberry would be to become "firmly luxury." He said that meant pulling out of undesirable locations, pushing up prices in some areas, cutting costs and refreshing its brand. He admitted that would take years to implement.

"It will take a reasonable amount of time," he warned.

The turnaround effort comes as much of the rest of the industry is enjoying decent growth. The global luxury market is currently growing at 6% from a year earlier, according to Exane BNP Paribas, its fastest rate in four years. That is driven by higher disposable income and improving consumer confidence in China. A corruption crackdown there and general worries about the economy had weakened demand until recently.

Growth remains sluggish in the U.S., however, where big department stores, once the curators of high fashion, are closing stores and slashing prices. Mr. Gobbetti said he plans to reduce sales to some department stores. He promised to try to reduce discounting and upgrade to locations that bolster the high-end image Burberry is chasing.

Net income for the six months rose 29% to GBP92.9 million ($122 million), buoyed by a strong showing from Burberry's core Chinese consumers and a good response to new rainwear and bags. Revenue rose 9% to GBP1.26 billion, or 4% adjusted for currency fluctuations.

Burberry reported strong growth in mainland China and said the Hong Kong market grew in the second quarter. Sales in Hong Kong had, for several quarters, been under pressure from dwindling Chinese tourism triggered by unrest and new visa restrictions.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

November 09, 2017 14:24 ET (19:24 GMT)