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Burberry warns over profits as sales dip into the red

Published 14/04/2016

Burberry has been battling a slowdown in luxury spending, sparked by China's economic woes
Burberry has been battling a slowdown in luxury spending, sparked by China's economic woes

Luxury fashion group Burberry has warned tough trading will hit profits for the year ahead after seeing recent sales slump back into the red.

The group - famous for its trench coats and check scarves - revealed fourth quarter sales tumbled by 5% amid lower spending by Chinese tourists in continental Europe and a collapse in the Hong Kong luxury market.

Burberry shares dropped by 7% on the FTSE 100 Index as it cautioned that profits for the new financial year ending 2017 would be at the bottom end of forecasts, even with a £60 million currency boost taken into account.

The fashion label has been battling a slowdown in luxury spending, sparked by China's economic woes.

It makes around a third of its sales from the Asia Pacific region and has been hit hard as Chinese tourists have reined in their spending, particularly in Hong Kong - traditionally a prime shopping destination for Chinese consumers.

The group said retail sales fell 2% overall in the final six months of its year, but were 1% higher with Hong Kong and Macau stripped out.

It is expecting profits for the year to the end of March to meet City expectations, but investors were left reeling by its latest warning for 2016/17 results.

Embattled chief executive Christopher Bailey, who is also chief creative officer, said the group would continue to slash costs to help offset the difficult trading.

"In an external environment that remains challenging for luxury, we continue to focus on reducing discretionary costs and are making good progress with developing enhanced future productivity and efficiency plans," he said.

He is hoping the efficiency drive and turnaround efforts may limit profit pressure over the year ahead and will provide an update on plans at annual results next month.

Burberry had raised hopes it was turning the corner earlier this year when it halted sales declines in the third quarter, with like-for-like trading remaining flat.

Cost savings also helped shore up half-year figures, with the group posting a 3% rise in underlying pre-tax profits to £153 million in the six months to September 30, which confounded market forecasts for a fall.

But the group's latest update revealed that Hong Kong trading remained grim, with sales down by more than 20% for the third quarter in a row.

The UK and Middle East also continued to be difficult in the final six months of the financial year.

Analysts at Liberum said Burberry's fourth-quarter trading showed sales "under pressure in all areas".

They also cautioned over the firm's cost-cutting: "In our view the savings that the company has found in the past six months will become a cost headwind in 2017."

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