Burberry cuts markdowns as sales return to growth

British luxury brand Burberry is to reduce discounting as it seeks to capitalise on sales returning to growth in October for the first time since the pandemic began. The reduction in markdowns is expected to have an impact on sales in Q3, running from end-September to end-December.

Chief financial officer Julie Brown cited strong sales in the Americas, China and Korea as the reasoning behind the markdown decision. “What we’re seeking to do is delay the start of the markdown and reduce the volumes that go into the markdown,” she said. “In terms of product line, it will be across the range and it will be generally across the line.”

The expectation is that the new policy will have a high single-digit negative impact on comparable stores sales growth in the upcoming quarter. Comparable store sales were down 6 per cent in the three months to 26 September, up from a 45 per cent drop in the previous quarter. This was ahead of analyst expectations of a 12 per cent drop.

In the six months ending 26 September 2020, brand revenue was £878 million, down 31 per cent, while operating profit was £51 million, a 75 per cent drop on the same period last year. Burberry’s share price rose by 3 per cent following the announcement.

Like many of its industry peers, Burberry was bolstered by a late summer recovery in Asia, up 10 per cent, and the Americas, up 21 per cent, with the US and China performing particularly strongly over the last quarter.

The lack of foreign visitors continued to blight revenues from European stores. Sales in the last quarter in the Europe, Middle East, India and Africa (EMEIA) segment were down 39 per cent year-on-year. Foreign visitors typically contribute around half of sales at this time of year, but the numbers visiting Europe and the UK have dropped significantly because of Covid-19 restrictions.

Julie Brown said that positive news on a potential vaccine raised the prospect of long-haul tourism returning in the future, which would be positive for regions previously “subdued”, in particular EMEIA.

On the flip side, she said that the UK government’s imminent removal of the VAT Retail Export Scheme may have a long-term impact on tourism in the brand’s home market: “The challenge is we could lose our home market advantage competing against brands in Paris and Milan.” A significant proportion of non-EU visitors to the UK currently claim back the VAT discount. Burberry is in ongoing discussions with the UK government about the change.