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Two years ago, at the height of the post-pandemic retail boom, the Burberry (LSE: BRBY) share price hit 2,500p. Today, I can pick them up for about two-thirds of that price and it was kicked out of the FTSE 100 long ago. I have learnt the dangers of trying to catch a falling knife, the hard way. Now with tariffs hitting its largest market, China, is this the final nail in the coffin?
Refreshed strategy
Upon taking the reins at the back end of last year, CEO Joshua Schulman announced a new strategy, ‘Burberry Forward’. Since then, we have only received one trading update, at Q3 back in January.
Of course, it’s still very early in the transformation. But I was buoyed with some of its ideas. These include ‘It’s Always Burberry Weather’ outwear campaign and virtual scarf try-on capability. Clearly, the business realised it needed to move at speed and reignite brand desire.
Its results back then also highlighted that the decline in revenues had slowed down considerably to stand at 7%, year on year. But of course, a lot has happened since then and I am becoming increasingly concerned with the numbers it will report for the full year, due in May.
Luxury brands struggling
On Monday (14 April), French luxury owner LVMH posted disappointing Q1 results. Its core fashion brands that include Louis Vuitton and Dior saw sales decline 5%.
The company reported a main “swing factor” with Chinese demand in Japan. In 2024, a weak Japanese currency enticed Chinese shoppers to go on something of a spree while visiting Japan. That has not been repeated this year.
Upon examining Burberry’s Q3 results, I note that Japan was the only region in Asia Pacific that reported positive comparable store sales. Although no reason is given for this discrepancy, it could very well be for this swing factor, which doesn’t bode well for this year’s sales.
Buckling consumer
Its Americas region grew 4% in Q3 off improved local spending. More affluent US consumers, who tend to own financial assets, felt wealthier as portfolios grew. The sudden reversal in the stock market will have resulted in a negative wealth effect. This will hit consumer confidence and demand.
China, of course, has deep-seated problems of its own. A bursting bubble in its real estate market continues to cause economic pain for consumers.
My main concern about the company, though, is the escalating trade tensions between China and the US. It’s hard to believe that demand for luxury goods won’t decline, when the two largest economies are at each other’s throat.
Unlike many traditional retail businesses, luxury brands do have strong pricing power. This means they have the ability to offset some of the increased costs. That is the theory, anyway. In practice, I am not so sure such a strategy would work, particularly for Burberry. The company’s core customer doesn’t tend to be high-net-worth individuals, for starters.
Although I have painted a pretty bleak picture for the business, I don’t see this as a lost cause. Luxury brands tend to do well when the economy is booming. When that time comes around, if the company can have put its house in order, there’s a good chance the share price will respond. But I won’t be buying any more shares at the moment.
