MILAN  - Burberry is in a tough spot. The 7 billion pound British fashion group eked out a meagre 1 percent growth in sales last quarter, worse than rivals. A chaotic Brexit is also a growing concern. The dismal performance makes the response to the first collection from new designer Riccardo Tisci all the more critical.

Burberry’s results for the 13 weeks to December 29 look unimpressive. The group’s comparable same-store revenue growth pales against Hugo Boss’s 4 percent in the final quarter of 2018. For Italy’s Brunello Cucinelli, like-for-like revenue grew 3.5 percent in 2018. Softer sales in places like Hong Kong and Japan, and the impact of “yellow vest” riots in France, were partly to blame.

But the worst could be yet to come for Britain’s biggest luxury group. Burberry Chief Financial Officer Julie Brown did not hide her concerns about the threat of a no-deal Brexit. She reckons customs duties between the UK and mainland Europe could cost in the “low 10s millions of pounds”, a manageable hit in light of next year’s expected EBIT of 467 million pounds, as per Refinitiv data. The bigger headache is the delays that new customs duties would mean for goods that Burberry makes in the UK and ships overseas, and vice versa. This would force Burberry to keep more inventory, and push up costs.

There is a silver lining. Designer Tisci’s debut collection has received rave reviews, leading to a doubling of orders from wholesale buyers in the United States – which represent 5 percent of global sales – and a “significant” order increase in the cluster of Europe, Africa, India and the Middle East, a more important region for Burberry. The key question is whether the wholesale success will translate into purchases in stores. Wholesale revenues made up just 17 percent of Burberry’s total business in the last fiscal year. Encouragingly, Tisci’s arrival seems to also have improved Burberry’s image in the social media sphere. Followers on its Instagram and WeChat accounts rose by 1 million in the last quarter.

Yet, the collection will start to hit stores in February, and the full effect will only be visible months later. Until then, investors must brace for more immediate headwinds.

CONTEXT NEWS

- British luxury brand Burberry reported a 1 percent rise in same-store sales in the 13 weeks ending Dec. 29, missing a 2 percent growth forecast.

- Retail revenue was 711 million pounds, down 2 percent at constant exchange rates.

- The company kept unchanged its 2019 full-year guidance, which includes cumulative cost savings of 100 million pounds.

- Burberry shares were down 1.6 percent to 17.47 pounds at 0924 GMT on Jan. 23.

(Editing by Neil Unmack and Bob Cervi)

© Reuters News 2019