Burberry reported a rise in sales, but its stock price plummeted. What unsettled investors?

Burberry, the British company known for its luxury trench coats, reported an increase in sales last quarter, with all product categories showing growth for the first time in three years. The results stem from a strategy to revitalize the fashion brand, according to the Wall Street Journal. However, investors had hoped to see more convincing signs of a recovery. Geopolitical tensions and a decline in tourist traffic have led market participants to question the sustainability of Burberry’s growth, Reuters notes. The company’s stock plummeted 6.5%.

Burberry's comparable sales in the first quarter, which ended in June, rose 5% compared with the same period last year—fully in line with analysts' consensus forecast, according to the WSJ.

In North and South America, sales jumped by 12% at once, significantly exceeding expectations, while in Greater China, they rose by 9%. However, in Europe and the Middle East, sales fell by 3% as tourist traffic to Middle Eastern shopping destinations such as Dubai declined, and Europe attracted fewer shoppers from Asian countries, Reuters explains. The war in the Persian Gulf is having a negative impact on tourist spending in Europe, the company noted. Although the Middle East accounts for only 2% of Burberry’s sales, the indirect consequences of the conflict have nonetheless caught the attention of investors, the agency reports.

For the current fiscal year, the company expects revenue growth and higher margins in line with market forecasts. However, Burberry cautioned that the geopolitical and economic situation remains uncertain and could negatively impact consumer confidence.

Burberry shares fell 6.5% during trading in London on July 17, erasing the gains made over the previous two days. The decline was driven by optimism following a strong earnings report from rival luxury company Richemont. Year-to-date, Burberry’s stock is down 17%.

The market reaction reflects concerns that the next phase of Burberry’s recovery will prove more challenging, explains Bloomberg. The luxury industry is trying to bring shoppers back to its boutiques after two years of stagnant sales and amid challenging market conditions, the WSJ reports.

Two years ago, the British company launched a business turnaround plan aimed at boosting sales and cutting costs. Burberry CEO Joshua Shulman began the transformation by reducing inventory, lowering prices, and refocusing on the brand’s iconic products. In addition, he revamped store layouts, for example, by creating special areas to showcase scarves. All of this helped attract both existing and new customers, according to Bloomberg.

“Our strategy is working. We are attracting a broad range of luxury consumers across various categories, sales channels, and regions, which reinforces my confidence in the opportunities ahead of us,” Shulman wrote in a report on July 17.

Analysts at Jefferies, led by James Grzinich, believe the company has already exhausted the main levers for restoring profitability, including cost optimization. In their view, further recovery in profitability will largely depend on whether the company can achieve higher sales growth rates.

"Now it all depends on the company's management: it will need to sustain the recovery and give it additional momentum," noted Luka Solka and Maria Meita of Bernstein.

Overall, analysts view Burberry’s outlook with moderate optimism: 13 of the 21 analysts covering the stock recommend buying it. Four are neutral, and the remaining four advise selling the luxury brand’s stock.

This article was AI-translated and verified by a human editor