Stitched Up: The High Cost of Burberry's Fashion Overhaul

Burberry, the iconic British lux­ury fash­ion house known for its dis­tinc­tive plaid pat­tern and trench coats, is fac­ing a sig­nif­i­cant fi­nan­cial down­turn that threat­ens its po­si­tion as a lead­ing global brand. The com­pany's strug­gles have cul­mi­nated in its im­pend­ing exit from the FTSE 100 in­dex af­ter a 15-year tenure, mark­ing a stark re­ver­sal of for­tune for the once-thriving fash­ion pow­er­house.

The scale of Burberry's de­cline is starkly il­lus­trated by its fi­nan­cial per­for­mance. In the fis­cal year end­ing March 30, 2024, Burberry re­ported rev­enue of £2.97 bil­lion, a 4.07% de­crease from the pre­vi­ous year. More alarm­ingly, net in­come plum­meted by 44.90% to £270 mil­lion, re­sult­ing in a net profit mar­gin of just 9.10%, down from 15.84% the pre­vi­ous year. Earn­ings per share (EPS) fell by 39.67% to £0.74, re­flect­ing the com­pany's strug­gling prof­itabil­ity.

The com­pany's bal­ance sheet also shows signs of strain. Cash and short-term in­vest­ments de­creased by 57.02% to £441 mil­lion, while to­tal as­sets de­clined by 8.57% to £3.37 bil­lion. This liq­uid­ity crunch is fur­ther ev­i­denced by the neg­a­tive net change in cash of £599 mil­lion, a wor­ry­ing 177.31% de­crease from the pre­vi­ous year.

Burberry's stock mar­ket per­for­mance has been equally dis­mal. The com­pany's share price has fallen by over 50% in 2024, wip­ing out bil­lions in mar­ket cap­i­tal­i­sa­tion. This dra­matic de­cline has led to Burberry's im­pend­ing rel­e­ga­tion from the FTSE 100, a sig­nif­i­cant blow to its sta­tus as a blue-chip com­pany.

At the heart of Burberry's trou­bles lies a per­fect storm of in­ter­nal mis­steps and ex­ter­nal chal­lenges. The com­pany's am­bi­tious at­tempt to repo­si­tion it­self as a high-fashion lux­ury brand has back­fired, alien­at­ing its core cus­tomer base and fail­ing to at­tract the de­sired ultra-wealthy clien­tele. This strat­egy shift, spear­headed by for­mer cre­ative di­rec­tor Ric­cardo Tisci, saw Burberry mov­ing away from its her­itage prod­ucts like the clas­sic trench coat in favour of more avant-garde de­signs and sig­nif­i­cantly higher price points.

Fi­nan­cial an­a­lyst Je­lena Sokolova of Morn­ingstar notes, "They tried to be a ma­jor fash­ion player be­cause fash­ion was back in fash­ion. It was the same with boost­ing leather goods. Nei­ther of these things, I would say, are ex­tremely strongly in the brand DNA."

The num­bers paint a grim pic­ture of Burberry's de­cline. Sales in the first quar­ter of the 2024 fis­cal year fell by 21% year-over-year, prompt­ing the sus­pen­sion of its div­i­dend and the oust­ing of CEO Jonathan Akeroyd af­ter just two years at the helm. This lead­er­ship tur­moil is re­flected in the sub­stan­tial "golden hello" pack­age worth up to £9.2 mil­lion of­fered to new CEO Joshua Schul­man, high­light­ing the com­pany's des­per­ate need for a turn­around.

Ex­ter­nal fac­tors have also con­tributed to Burberry's woes. The global lux­ury mar­ket is fac­ing head­winds, par­tic­u­larly in China, a cru­cial mar­ket for high-end brands. Burberry re­ported a more than 20% de­cline in sales in main­land China, a trend mir­rored by other lux­ury brands. For con­text, LVMH, the world's largest lux­ury group, saw its sales in Asia (ex­clud­ing Japan) fall by 14% in the sec­ond quar­ter of 2024, while Richemont re­ported a 27% drop in sales in China, Hong Kong, and Macau.

The com­pany's strug­gles high­light a broader trend of volatil­ity in re­tail stocks, es­pe­cially in the lux­ury sec­tor. Burberry's price-to-book ra­tio of 2.10 and re­turn on as­sets of 7.41% in­di­cate that in­vestors are in­creas­ingly skep­ti­cal about the com­pany's abil­ity to gen­er­ate value from its as­sets.

In­dus­try ex­perts sug­gest that Burberry's path to re­cov­ery lies in re­turn­ing to its roots. A closer look at the com­pany's prod­uct mix re­veals the ex­tent of its de­vi­a­tion from its core strengths. Out­er­wear, once Burberry's sig­na­ture cat­e­gory, now ac­counts for only 30% of its rev­enue, with the iconic trench coat con­tribut­ing a mere 10%. In con­trast, ap­parel, one of the slowest-growing seg­ments in lux­ury, makes up about 60% of Burberry's sales.

Adam Cochrane, an an­a­lyst at Deutsche Bank Re­search, ar­gues, "Burberry was try­ing to ex­pand into cat­e­gories and price points where it did not have suf­fi­cient brand de­sir­abil­ity or her­itage." A re­newed fo­cus on iconic prod­ucts like the trench coat and a more ac­ces­si­ble pric­ing strat­egy could help re­build con­sumer trust and brand loy­alty.

The ap­point­ment of Joshua Schul­man as the new CEO sig­nals a po­ten­tial shift in strat­egy. Schul­man's ex­pe­ri­ence at Coach and Jimmy Choo sug­gests a move to­wards a more bal­anced ap­proach, po­ten­tially po­si­tion­ing Burberry as a "British Coach" – a brand that of­fers lux­ury at more at­tain­able price points.

As Burberry nav­i­gates this chal­leng­ing pe­riod, its per­for­mance serves as a cau­tion­ary tale for other lux­ury brands. The com­pany's strug­gles un­der­score the im­por­tance of main­tain­ing brand iden­tity while adapt­ing to chang­ing mar­ket con­di­tions. For in­vestors, Burberry's sit­u­a­tion high­lights the in­creas­ing volatil­ity in re­tail stocks, par­tic­u­larly in the lux­ury sec­tor, where brand per­cep­tion and global eco­nomic fac­tors can quickly im­pact fi­nan­cial per­for­mance.

The com­ing months will be cru­cial for Burberry as it at­tempts to re­gain its foot­ing in the com­pet­i­tive lux­ury mar­ket. With free cash flow de­clin­ing by 47.53% to £274.5 mil­lion, the com­pany's abil­ity to in­vest in its turn­around strat­egy while main­tain­ing fi­nan­cial sta­bil­ity will be closely watched. The suc­cess of its new di­rec­tion un­der Schul­man's lead­er­ship will not only de­ter­mine the fu­ture of this British icon but also pro­vide valu­able in­sights into the evolv­ing dy­nam­ics of the global lux­ury fash­ion in­dus­try.