Burberry Group plc (LON:BRBY) has announced its interim results for 26 weeks ended 26 September 2020.
· H1 FY2021 saw a 31% revenue fall with adjusted operating profit down 75% and adjusted diluted EPS down 88% (reported diluted EPS down 66%).
· Recovery underway with sequential improvement in comparable store sales to -6% in Q2 FY2021 from -45% in Q1 FY2021 and returning to growth in October
· Q2 FY2021 saw strong double digit growth in Mainland China, Korea and the U.S.; EMEIA, Japan and South Asia Pacific remain impacted by the significant reduction in tourism.
· Good strategic progress despite COVID, especially in four areas:
o Strong response to product with marked increase in the weight of full-price channels YoY
o Growth in leather goods – outperforming the average retail comp
o Excellent growth on digital, up high double digits
o Good brand traction as we attract new and younger customers
· Performance underpinned by rigorous management of cost and cash with long term financing in place with the issue of a sustainability bond
Outlook FY2021
We are encouraged by the recovery in Q2 FY2021 but remain conscious of the uncertain macro-economic environment caused by COVID-19. We currently have more than 10% of our stores closed globally following the recent lockdowns in EMEIA. With the brand resonating and attracting new and younger consumers, we have taken the decision to reduce markdowns and this will be a revenue headwind in H2 FY2021 with the main impact in Q3 FY2021 but will serve the long term interest of the brand. We are well positioned to continue to drive performance and deliver growth in the medium term.
The financial information contained herein is unaudited.
All metrics and commentary in the Interim Review exclude adjusting items unless stated otherwise.
Constant exchange rates (CER) removes the effect of changes in exchange rates compared to the prior period. This takes into account both the impact of the movement in exchange rates on the translation of overseas subsidiaries’ results and also on foreign currency procurement and sales through the Group’s UK supply chain.
The following alternative performance measures are presented in this announcement: adjusted profit measures, comparable sales, free cash flow, adjusted EBITDA and net debt. The definitions of these alternative performance measures are set out in the Appendix on page 14.
Cumulative cost savings are savings compared to FY 2016 operating expenses. The savings relating to the store rationalisation programme are measured compared to the reported costs which were under IAS 17.
Certain financial data within this announcement have been rounded.
“Though the momentum we had built was disrupted by COVID-19 at the start of the year, we were quick to adapt, while making further progress against our strategy. While the virus continues to impact sales in EMEIA, Japan and South Asia Pacific, we are encouraged by our overall recovery and the strong response to our brand and product, particularly among new and younger customers. In an environment which remains uncertain, we will continue to deliver exceptional product, localise plans and shift resources, while leveraging the strength of our digital platform to inspire customers.” – Marco Gobbetti, Chief Executive Officer
GROUP H1 FY2021 FINANCIAL HIGHLIGHTS
· Revenue £878m -30% CER, -31% reported
· Retail comparable store sales -25% (Q1: -45%; Q2: -6%) with good recovery as the half progressed.
Adjusted operating profit:
· Adjusted operating profit £51m, -71% CER.
· Gross margin was up 90bps at CER, partly offset by currency resulting in +60bps at reported rates, benefiting from geographical and full price channel mix and reduced charges for inventory provisioning.
· Operating expenses at reported rates fell 17% following cost savings.
· Adjusted diluted EPS 4.6p, 88% decline.
Reported profit measures:
· Reported operating profit £88m, -56% after adjusting items of £37m credit (H1 FY2020: £1m charge).
· Diluted EPS 12.2p, -66% reported.
Cash measures:
· Free cash outflow of £45m (H1 FY2020: £29m outflow). After an outflow of cash in April when 60% of stores were closed, we stabilised in May and were free cash flow positive from August. The H1 FY2021 outflow reflects trading and is in line with normal seasonality which includes the festive season inventory build.
· Cash net of overdrafts and borrowing of £542m at 26 September 2020 (28 March 2020: £587m). Cash net of overdrafts amounted to £1,138m with borrowings of £596m (with £297m from the bond and £299m from the CCFF). The £300m RCF is currently undrawn.
· No interim dividend declared (H1 FY2020: 11.3p) – as guided at the FY2020 results.
Summary income statement
| Period ended £ million | 26 Sept 2020 | 28 Sept 2019 | % change Reported FX | % change CER |
| Revenue | 878 | 1,281 | (31) | (30) |
| Cost of sales* | (280) | (416) | ||
| Gross profit* | 598 | 865 | (31) | |
| Gross margin %* | 68.1% | 67.5% | +60bps | |
| Operating expenses* | (547) | (662) | (17) | |
| Opex as a % of sales* | 62.3% | 51.6% | ||
| Adjusted operating profit* | 51 | 203 | (75) | (71) |
| Adjusted operating margin %* | 5.8% | 15.9% | (10.1%pts) | (9.3%pts) |
| Adjusting operating items | 37 | (1) | ||
| Operating profit | 88 | 202 | (56) | |
| Net finance (charge) ~ | (15) | (9) | ||
| Profit before taxation | 73 | 193 | (62) | |
| Taxation | (25) | (43) | ||
| Attributable profit | 48 | 150 | ||
| Adjusted profit before taxation* | 36 | 195 | (82) | (77) |
| Diluted adjusted EPS (pence)* | 4.6 | 36.9 | (88) | (85) |
| EPS (pence) | 12.2 | 36.4 | (66) | |
| Weighted average number of diluted ordinary shares (millions) | 404.7 | 412.5 |
* Excludes adjusting items. ~ Includes adjusting finance charge of nil (H1 FY2020: £1m).
BUSINESS AND FINANCIAL REVIEW
Over the last two years we transitioned the brand and product and pre-COVID-19 were seeing increased momentum. In January, ahead of the outbreak, we delivered double digit comparable store sales growth. FY2021 commenced with 60% of stores closed globally due to COVID-19, which led to a material impact on trading in Q1 FY2021 and comparable store sales down -45%. We adapted rapidly as stores reopened and saw a strong recovery resulting in a -6% comp in Q2, led by full-price channels. The recovery has further accelerated in the last two months, with comparable store sales in September down low single digit and positive in October.
With restricted travel and evolving consumption patterns, we have reoriented our business to capture opportunities in rebounding markets, localising plans and shifting resources where needed. This has resulted in higher exit rates in September compared with June and strong performance in Americas and Asia. In Americas, comparable store sales were +21% in Q2 FY2021, with the US higher than the regional average, driven by momentum with new and younger customers and full price channels outperforming. In Asia, comparable store sales were +10%, with strong growth in Mainland China and Korea more than offsetting the performance of other Asian markets including Hong Kong SAR and Australia. In Mainland China, we have seen a positive reaction to localised campaigns and strong response to our core product categories – leather goods, in particular Pocket, and outerwear, which experienced high double digit growth in Q2 FY2021. Mainland China has enjoyed good double digit sales growth in full price channels since May.
Given the importance of digital in the current environment, we have also leveraged our strength in this area resulting in high double digit growth in Q2 FY2021. The channel has been particularly important in supporting regions with second waves of COVID-19. In these regions, digital sales significantly grew as the stores saw temporary closures. We have driven this acceleration through immersive experiences on .com, such as our BSurf game accompanying the Summer Monogram capsule and online world, a series of digital pop-ups dedicated to leather goods, and exceptional-visibility activations on third party platforms. In September, we participated in Tmall’s SuperBrand Day, driving the highest single-day sales to date on Tmall.
Success continues to depend on leveraging digital to also bridge online and offline, as well as driving traction with local customers. In Mainland China, where we have seen significant digital adoption, we opened our first social retail store in Shenzhen Bay in an exclusive partnership with Tencent. Since its launch in July, it is outperforming our expectations and attracting new and younger consumers to the brand. Globally, we have focused on mitigating the impact of reduced traffic and tourist spend in stores. For instance, we have been amplifying our appointments strategy, launching new, locally relevant formats (e.g., at-home appointments, virtual appointments, styling events) that deliver a luxury shopping experience and ensure our clients feel safe. We have also introduced new online-to-offline customer journeys, linking consumers browsing on .com directly to sales associates in stores.
Throughout COVID -19, the customer response to our brand and product has remained strong. We continued to innovate and deliver inspiration to engage customers and drive revenue in this environment. For instance, to celebrate our Summer Monogram capsule, we launched our first computer-generated campaign, featuring self-portraits captured at home by Kendall Jenner, which had a great response from press and consumers. In just two days, we saw double digit growth in pieces of coverage and met our ambitious sales targets for the launch. In addition, challenged with how we present our new runway collection, we hosted our Show open to all to experience digitally on Twitch – making us the first luxury brand to partner the live-streaming video platform. To date, with 118m views across all platforms, it has become our most viewed show on record. These activations have attracted new and younger customers to the brand, driving a considerably higher share of sales from these clients in Q2 FY2021 than Q1 FY2021.
In terms of product, our collections continue to resonate with consumers. This has supported a noticeable increase in the weight of full price sales. In addition, we have started to see considerable traction in leather goods, outperforming overall retail comparable sales growth performance single digit growth in Q2 FY2021. The bags family architecture we established – Lola, TB, Pocket and Title – now account for the majority of full price sales in bags, supported by a series of over 40 leather goods activations and pop-ups we have launched in the first half of this year. Finally, as part of AW20 we launched the Olympia bag that has seen a strong initial momentum.
Our H1 FY2021 performance has been underpinned by strong cash and cost discipline. We ended the period with £542m of cash net of overdrafts and borrowings and cash net of overdrafts of £1,138m. As at 26 September 2020, the 12 month adjusted Net Debt / adjusted EBITDA ratio was 0.9x, and remained inside our target range of 0.5x to 1.0x despite the impact of the pandemic. To diversify our borrowings into longer term financing, we issued our sector’s first sustainability bond that raised £297m, net of costs, following the receipt of a Baa2 rating (stable outlook) from Moody’s. Cost savings have also progressed well. We now expect the original cost reduction programme to bring cumulative savings of £148m by the end of FY2021 up from the £140m target reported at the FY2020 results. This increase leads to a £23m cost reduction in FY2021 compared with our original guidance of £15m. We are also on track to achieve the annualised £55m of cost savings from the rationalisation programme announced at Q1 FY2021 and plan to reinvest this into customer facing activities.
ESG:
We are committed to having a positive impact on people and the planet and during the half, we continued to make progress against our social and environmental agenda. In addition to linking the bond proceeds to our sustainability goals, we took measures to further reduce our environmental footprint. Our retail operations in Mainland China, Hong Kong SAR, Macau SAR, Malaysia, Singapore and Thailand are now carbon neutral and source 100% renewable electricity. We also further supported the decarbonisation of our supply chain, helping our Italian suppliers in their transition to renewable energy. At the same time, we introduced a global D&I policy to ensure we attract and retain a diverse workforce wherever we operate. We reinforced our commitment to the LGBTQ+ community, becoming the first luxury company to join the Stonewall Diversity Champions Programme. We also strengthened our community support by expanding our creative arts scholarships for underrepresented students to world renowned institutions in London, New York and Paris, while the Burberry Foundation widened its in-school arts and culture programme Burberry Inspire’ to the US.
Brexit mitigation:
We continue to implement plans to mitigate the impact of the UK’s withdrawal from the EU. Post transition, we will face operational challenges associated with cross border movement of goods and potentially incremental duty costs. Our plans cover the short term impact of managing the new Customs border and extend to strategic options to reconfigure elements of our supply chain as required, particularly if there is no prospect of a zero tariff Free Trade Agreement.
First half financial performance
· FY2021 commenced with 60% of stores closed globally due to COVID-19 with most reopening by the end of June. This had a very material impact on trading in Q1 FY2021 that saw comparable store sales fall 45% but we have been pleased by the recovery in Q2 FY2021 at ‑6%. Trading patterns have been affected by tourism flows globally with tourists accounting for just 4% of full price channel sales in the period down from 28% in H1 FY2020. The exit rate for overall comparable store sales improved with September down by a low single digit percentage and October turning positive. Overall the 29% decline in retail sales and 38% reduction in wholesale revenue led to a 30% decline in CER revenue and 31% reported revenue decline in H1 FY2021 to £878m (H1 FY2020 £1,281m).
· Group adjusted operating profit declined 71% in the half at CER. Gross margin increased in the period by 90bps CER and 60bp reported due to Asian and retail sales mix and reduced charges for inventory provisioning. Operating expenses were strictly controlled and fell by 17%. This excludes £26m of cash rent concessions negotiated during the crisis as well as stock, store and receivable impairment reversals that we have treated as an adjusting item. Reported operating profit declined 56% including £37m of adjusting items credits. FX was an £8m headwind in H1.
· There was a £45m free cash outflow (H1 FY2020 £29m outflow) in the half caused by the trading environment. Working capital absorbed £90m of cash (H1 FY2020 £120m) with inventory increasing £34m (H1 FY2020 £51m) in line with normal patterns ahead of the festive season. Capital expenditure amounted to £46m (H1 FY2020 £68m).
Revenue analysis
Revenue by channel
Retail
· Retail sales -29% at CER; -30% reported.
· Impact of space -4%.
H1 FY2021 comparable store sales -25% (Q1 FY2021: -45%; Q2 FY2021: -6%).
Revenue comparable store sales commentary by region
Asia Pacific Flat (Q1 FY2021: -10%; Q2 FY2021: +10%)
· Asia Pacific saw the best regional performance in H1 FY2021 due to strong performance in Mainland China and Korea.
· Mainland China saw improved momentum in the period with Q2 comparable store sales increasing ahead of the June exit rate boosted by some repatriation of spend.
· Korea also remained strong despite the short term impact of the second wave.
· South Asia Pacific (SAP) fell materially, affected by trading in Hong Kong SAR and further store closures during the second wave in Australia.
· Japan also fell, impacted by softness in tourist arrivals and annualisation of last year’s consumption tax increase.
EMEIA -56% (Q1 FY2021: -74%; Q2 FY2021: -39%)
· EMEIA was especially impacted by travel trends with more than 50% of sales typically from tourists in the first half in previous years.
· Continental Europe saw a decline broadly in line with the regional average but encouragingly local spend increased in Q2 FY2021.
· Middle East performed better than the average and recovered well with Q2 FY2021 down mid-single digit and local spend up strongly.
· UK remained difficult with tourist demand weak given the high London exposure. Local demand increased in Q2 FY2021.
Americas -28% (Q1 FY2021: -70%; Q2 FY2021: +21%)
· Americas saw the biggest recovery between quarters as the stores reopened
· Q2 FY2021 enjoyed good growth, driven by sales to locals and strong digital performance. Within this, the US outperformed in the region.
Digital performed well in the period with double digit growth in H1 FY2021 and strong double digit in Q2 FY2021 across all regions. It performed particularly well in the Americas where growth in Q2 FY2021 was well into triple digits.
By product
· All product categories were impacted by the store closures in Q1 FY2021 but saw improvement in Q2 FY2021. The key Q2 highlights included:
· Leather goods increased low single digits in Q2 FY2021 with our four bag pillars accounting for over 60% of women’s bag sales.
· Menswear performed well in Q2 FY2021 due to good traction in jersey wear and trousers. Womenswear also saw a good performance in dresses and knitwear. Across ready-to-wear our house codes continue to resonate strongly and outperformed in the period.
· Outerwear was impacted by lockdown and working from home. However, we saw high double digit growth in Mainland China in Q2 FY2021 following a successful localised Trench campaign featuring Zhou Dongyu generating nearly 100m impressions and circa 4m interactions across social media channels.
Store footprint
The transformation of our distribution continued as we addressed high priority programmes:
· In H1 FY2021 we opened 12 stores and closed 12 stores.
· Key openings included 9 in Mainland China including our first Social Retail store in Shenzhen
· Cumulative 29 stores closed to date of the 38 planned closures from the non-strategic store rationalisation programme.
· A cumulative 83 stores are now new or refurbished and aligned to our new creative vision, an increase of 19 in H1 FY2021.
Wholesale
Wholesale revenue declined 38% at CER as we reduced inventory in the system to actively limit excess stock and third party discounting.
This was a little ahead of our original guidance due to the timing of shipments.
All regions saw large double digit percentage declines with Asia Pacific seeing the greatest fall given to the impact from travel retail.
Licensing
Licensing revenue fell 24% due to lower sales from the COVID-19 fallout.
Operating profit analysis
Adjusted operating profit
Adjusted operating profit declined 71% and margin decreased by 9.3%pts at CER.
· Gross margin increased 90bps at CER and 60bps reported. This benefited from higher margin Asian revenues as a proportion of the mix, the higher percentage of retail over wholesale and reduced charges for inventory provisioning.
· Adjusted operating expenses fell by 17% against last year, in line with our guidance of a mid-teens percentage reduction. This benefited from lower store depreciation following the FY2020 impairment charge, the cost reduction programme, non-strategic store closures as well as a number of other more temporary savings.
Adjusted operating profit amounted to £51m including an £8m FX headwind in H1 FY2021.
Adjusting items*
Adjusting items were a credit of £37m (H1 FY2020: £2m charge).
| Adjusting items* Period ended £ million | 26 Sept 2020 | 28 Sept 2019 |
| The impact of COVID-19 | ||
| Inventory provisions | 7 | – |
| Rent concessions | 26 | – |
| Store impairments | 23 | – |
| Receivable impairments | 2 | – |
| COVID-19 adjusting items | 58 | – |
| Restructuring costs | (22) | (1) |
| BME deferred consideration income | 1 | – |
| Adjusting operating items | 37 | (1) |
| Adjusting financing items | – | (1) |
| Adjusting items | 37 | (2) |
The major adjusting items are as follows:
· Impact of the COVID-19 pandemic: around half of the adjusting items relate to rent concessions across our retail network with the remainder relating to impairment reversals to the carrying value of inventory, stores and receivables due to the positive reassessment of underlying assumptions.
· Restructuring costs: £18m related to the organisational changes announced in July 2020 and £4m to the cost-efficiency programme announced in 2017 that is due to end this year.
· Burberry Middle East deferred consideration income: the £1m income reflects the revaluation of the deferred consideration balance.
· Adjusting finance charge: the £1m prior year charge relates to the deferred consideration that arose from the Burberry Middle East and Burberry Manifattura transactions.
Adjusted profit*
After a net finance charge of £15m (H1 FY2020 £9m), adjusted profit before tax was £36m (H1 FY2020 £195m).
*For detail on adjusting items see note 4 of Condensed Consolidated Interim Financial Statements
Taxation
The effective tax rate on H1 FY2021 adjusted profit was 50.9% (H1 FY2020: 22.0%, FY2020: 22.3%). This was higher than normal due to the geographical mix of profits and the impact of prior year adjustments on a relatively low profit base. The effective tax rate on H1 FY2021 reported profit before taxation was 33.6% (H1 FY2020: 22.1%, FY 2020: 27.9%), due to the impact of the lower tax rate on adjusting items.
The effective tax rate on adjusted profit for FY2021 is estimated to be around 30% (FY 2020: 22.3%) due to the geographical mix of the profits and the impact of adjustments in respect of prior years.
Cash flow
Free cash outflow* was £45m in the half (H1 FY2020 outflow of £29m). During the period we saw a significant outflow in April, stabilising in May and turning cash positive from August.
The major components were:
· Cash from operations fell from £261m to £86m
o A working capital outflow of £90m (H1 FY2020: £120m) due to normal seasonal patterns.
o Depreciation and amortisation fell £31m including £24m attributed to lower depreciation on right of use asset reflecting the impairments recorded at March FY2020.
· Capital expenditure of £46m (H1 FY2020: £68m) as we prioritised targeted capex projects and retained flexibility in the current trading environment.
Cash net of overdrafts at 26 September 2020 was £1,138m, compared to £670m at 28 September 2019 and £887m at 28 March 2020. At 26 September 2020 borrowings were £299m from the CCFF and £297m from the bond issue leaving cash net of overdrafts and borrowings of £542m (28 March 2020: £587m). We repaid the RCF in June and this remains committed. Our net debt* including reported lease liabilities was £550m (28 March 2020: £538m). Net Debt / adjusted EBITDA was 0.9x on a rolling 12 months period, remaining within our target range of 0.5x to 1.0x.
*For a definition of free cash flow and net debt see page 15.
| Period ended £ million | 26 Sept 2020 | 28 March 2020 |
| Adjusted EBITDA – rolling 12 months | 581 | 764 |
| Cash net of overdrafts | (1,138) | (887) |
| RCF drawn | – | 300 |
| CCFF drawn | 299 | – |
| Bond | 297 | – |
| Lease debt | 1,092 | 1,125 |
| Net Debt | 550 | 538 |
| Net Debt/Adjusted EBITDA | 0.9x | 0.7x |
Financial outlook
· While Burberry Group are encouraged by the revenue performance in October, trading is expected to be impacted by the recently announced lockdowns in Europe. Currently more than 10% of our stores are closed due to COVID-19 restrictions.
· With the brand resonating and attracting new and younger consumers, we have taken the decision to reduce markdowns and this will be a revenue headwind in H2 FY2021 mainly in Q3 FY2021 but will serve the long term interest of the brand.
· We expect space growth to be +3% in H2 FY2021.
· The full year tax rate is expected to be around 30%.
· Dividends will be reviewed at the end of FY2021.
· At 30 October spot rates, the impact of year-on-year exchange rate movements is expected to be a benefit of £5m on adjusted operating profit and a benefit of £16m on revenue for the full year.
