Burberry's smash hit new design boost business after Hong Kong woes

(Reuters) - British luxury brand Burberry (BRBY.L) said on Thursday the popularity of collections by its new chief designer Riccardo Tisci helped the group make up for lost sales in Hong Kong in the first half and it was sticking with year-end targets.

Chief Executive Marco Gobbetti is moving Burberry further upmarket in the luxury segment and Tisci came on board last year. His designs now account for 70% of the products in store.

Gobbetti said Burberry remained on track to deliver the first phase of his turnaround strategy despite the unrest in Hong Kong which has affected sales in the top luxury shopping destination.

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Sales in Hong Kong fell by a “double digit” amount in its first half and the company expects trading in the former British territory to remain under pressure.

Nevertheless, Burberry, famous for its trench coats, reported first-half revenue of 1.28 billion pounds ($1.64 billion), up 3% in constant exchange rates. Comparable store sales in the second quarter rose 5%, up from 4% in the first.

The shares rose 5.2% higher at 0953 GMT.

“We delivered financial results in line with guidance despite the decline in Hong Kong and we confirm our outlook for FY 2020,” Gobbetti said.

Burberry expects broadly stable top-line growth and adjusted operating margin for the year but warned on Thursday that gross margin for 2019-20 will be down around 150 basis points, 50 basis points worse than its previous forecast, partly due to the civil unrest in Hong Kong which shows no sign of abating.

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“We have seen a significant decline in Hong Kong across the half, largely driven by a fall in Chinese visitor spend,” Chief Financial Officer Julie Brown told reporters.

“In order to protect our staff at times we have closed stores where there have been protests occurring,” she said.

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Brown said Hong Kong was for Burberry, as for most luxury players, a higher margin market. Its percentage of Burberry’s total group sales fell from 8% to 5% in the most recent quarter.

The group has 12 stores in Hong Kong and has no intention of closing them permanently, she said.

“But what we are doing is very focused on working with the landlords to secure reductions in the rental levels given the significant drop in the business.”

Hong Kong’s Causeway Bay remains the world’s most expensive shopping street for rent, according to data from Cushman & Wakefield released on Wednesday.

Burberry will take 14 million pounds of store impairments relating to Hong Kong. It is also investing in product quality and is shifting older product lines with deeper discounts, which is impacting gross margin.

Its first half adjusted pro forma operating profit declined 4% at constant exchange rates to 187 million pounds.

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“Management has made good progress so far building the foundation to revitalize the brand but Burberry is now up against a less favorable external/competitive backdrop,” said RBC Europe analyst Rogerio Fujimori.

In an effort to increase reach into the lucrative Chinese market, Burberry has partnered with China’s Tencent (0700.HK) to develop what it called “social retail” in China, it said on Thursday.

“Together we will pioneer a concept that blends social media and retail, creating digital and physical spaces for engaged communities to interact, share and shop,” it said.

The deal will see Burberry open the first social retail store in Shenzhen, in the first half of 2020, utilizing Tencent technology.