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Just in case you got an extra billion pounds in spare change and don’t really want to keep it, Burberry (LSE:BRBY) can show you how to lose it in minutes. Simply make an announcement that you are not going to earnings for the year are not going to meet expectations, then watch the sterling fly. Burberry share price had dropped to 1,118.00 from yesterday’s close of 1,375.00, affecting its marketing cap by drawing it down from £6.03 billion as at 31 August to £4.94 this morning.
Oops!
“Oops” is the last thing you want to hear your surgeon, your barber, or your pilot say. It’s not that good when a CEO says it either. Reporting on results for the second quarter, Burberry reported a 6% growth in retail sales. Although modest, that number might have received a much better reception in the market had there been at least some growth in like-for-like sales. But such was not the case. The entire 6% was generated entirely by revenue from new retail space.
Compounding the problem instead of interest, CEO Angela Ahrendts reported that the company has been experiencing a decline in sales “in recent weeks.” She issued a profit warning saying that the board now expects pre-tax profits for the full year to been in the lower range of market expectations. Those expectations, of course, depend upon having a strong holiday retail season.
It’s Not Our Fault
“Oops. Mrs. Milligan, your husband died on the operating table, but it’s not our fault.” Ms. Ahrendts cited “the external environment” as “becoming more challenging” for the decline in sales. She said that “Second quarter retail sales growth has slowed against historically high comparatives.” That is the politically correct way to say that “We have done a poor job this quarter.”
Why is it never “my fault”? When the Lord confronted Adam and asked him what He had done (God already knew), Adam blamed the only other two persons he could. “This woman (blaming Eve) that you gave me (blaming God) made me do it.” It’s been the same way ever since. Blame poor performance on someone or something else.
The weak economy is the scapegoat currently in vogue, especially when a company ignores the key indicators and fails to anticipate customer responses correctly. The fact is that Burberry’s doesn’t apparently know what the cause of the flat sales was. This is clearly indicated by Ms. Ahrendts’ statement that the company was going to take a closer look at discretionary costs “to protect short term profitability.” If the external environment was the problem, then why attack discretionary costs? In fact, Ms. Ahrendts said that it was “too early to say exactly what caused the fall in customer traffic.”
We’ll Get It Right . . . Eventually
Don’t get me wrong. I understand what the company is doing to “protect” profitability. It’s just that the response is a bit too late. It’s like the captain of the Titanic saying, “Don’t worry. We’re going to back up and take another pass at it. Everything will be fine.” As investors demonstrated that they wouldn’t have believed the captain, and they probably don’t believe Ms. Ahrendts.
There has been a knock against retail companies for years. It is that they do not know how to sell. They know how to merchandise. This may be the time, if “the external environment” is changing, for retail leaders to learn how to sell their products. Burberry needs be prepared to deal with the external environment and find a unique way to draw customers into their starts and send them away with loaded shopping bags on their arms. Investors may not have enough patience or confidence to wait for Burberry to back up and have another go at it.
