Annual Financial Report

RNS Number : 4825Q

Burberry Group PLC

06 June 2018

 

6 June 2018

Annual Financial Report

Pursuant to Listing Rule 9.6.1, Burberry Group plc (the "Group") has submitted the following documents to the National Storage Mechanism and they will shortly be available for inspection at www.morningstar.co.uk/uk/NSM:

1. Annual Report and Accounts for the year ended 31 March 2018;

2. Notice of 2018 Annual General Meeting; and

3. Form of Proxy for the 2018 Annual General meeting.

The Annual Report and Notice of 2018 Annual General Meeting are also available on the Burberry Group plc website at www.burberryplc.com. The Annual Report will be delivered to the Registrar of Companies in due course.   

The Annual General Meeting ("AGM") will take place on Thursday, 12 July 2018 at Conrad London St. James, 22-28 Broadway, London, SW1H 0BH. The total of the votes cast by shareholders for or against or withheld on each resolution to be put to the meeting will be published on www.burberryplc.com as soon as possible after the meeting.

In compliance with The Disclosure Guidance and Transparency Rules (DTR) 6.3.5, the information in the Appendix below is extracted from Burberry Group plc's Annual Report and Accounts for the financial year ended 31 March 2018 (the "2017/18 Annual Report and Accounts") and should be read in conjunction with Burberry Group plc's Preliminary Announcement issued on 16 May 2018, both of which can be viewed at www.burberryplc.com. Together these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service.  This material is not a substitute for reading the 2017/18 Annual Report and Accounts in full and page numbers and cross-references in the extracted information below refer to page numbers and cross-references in the 2017/18 Annual Report and Accounts.

Enquiries

Investors and analysts		020 3367 3234
Charlotte Cowley	VP, Investor Relations	[e-mail]
Media		020 3367 3764
Andrew Roberts	VP, Corporate Relations	[e-mail]

APPENDIX: ADDITIONAL INFORMATION REQUIRED BY DTR 6.3.5

AUDIT REPORTS

The Preliminary Announcement includes a condensed set of financial statements. Audited financial statements for the financial year ended 31 March 2018 are contained in the 2017/18 Annual Report and Accounts. The Independent Auditors' Report on the Group financial statements and the parent company financial statements is set out in full on pages 129 to 136 of the 2017/18 Annual Report and Accounts.  The audit report is unqualified and does not contain any statements under section 498(2) or section 498(3) of the Companies Act 2006.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The following information is extracted from page 128 of the 2017/18 Annual Report and Accounts.

The directors consider that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and the Company's position and performance, business model and strategy.

Each of the directors, whose names and functions are listed on pages 72 to 73 confirm that, to the best of their knowledge:

-     the Company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 'Reduced Disclosure Framework', and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company;

-     the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and

-     the Strategic Report includes a fair review of the development and performance of the business and the position of the Group and the Company, together with a description of the principal risks and uncertainties that it faces.

PRINCIPAL RISKS

The following information is extracted from pages 54 to 65 of the 2017/18 Annual Report and Accounts.

OUR APPROACH TO RISK

Our strategy takes into account risks, as well as opportunities, which need to be actively managed. Effective risk management is essential to executing our strategies, achieving sustainable shareholder value, protecting the brand and ensuring good governance.

The Board is ultimately responsible for determining the nature and extent of the principal risks it is willing to take in achieving our strategic objectives (the Board's risk appetite), and challenging management's implementation of effective systems of risk identification, assessment and mitigation.

The Audit Committee has been delegated the responsibility for reviewing the effectiveness of the Group's internal controls and risk management arrangements. Ongoing review of these controls is provided through internal governance processes and the work of the Group functions is overseen by executive management, particularly the work of our Group Risk and Assurance Team and the Management Risk Committee.

Our risk management process is an integral part of our business, which is coordinated by our Group Risk and Assurance Team, reporting to our Chief Operating and Financial Officer. Risk management activities include identifying risks, undertaking risk assessments and determining mitigating actions. These activities are reviewed by Internal Audit and other control functions, which provide assurance to our Management Risk Committee, and ultimately to our Board of Directors and Board Committees, as shown in the diagram below.

Board of Directors and Board Committees
Responsible for regular oversight of risk management, for annual strategic risk review and setting the Group's risk appetite	Monitors risks through Board processes (Strategy Review, Audit Committee), management reports and deep dives of selected risk areas	Audit Committee reviews effectiveness of risk management process with support from Internal Audit
Management Risk Committee (Chaired by Chief Operating & Financial Officer)
Reviews external and internal environment for emerging risks Performs deep dive reviews of principal risks Reviews risk register updates from risk owners	Meets at least three times per year and reports key findings to the Audit Committee Cross-functional attendees, encompassing senior management from IT, Finance, Legal, HR, Supply Chain and Retail	Identifies changes to significant risks and the effectiveness and adequacy of mitigating actions to achieve agreed risk tolerance levels
Group Risk & Assurance Team	Functions and Business Risk owners	Internal Audit and Compliance Functions
·      Establishes risk management framework ·      Facilitates updates to risk registers ·      Provides resources and training to support process ·      Prepares Board and Management Risk Committee updates	·  Carry out day-to-day risk management activities ·  Identify and assess risk and implement action to mitigate risk within their area ·      Assign owners to risks to update risk registers	·  Review risk management process periodically ·      Functions provide independent assurance to management and Board on risk status (Health & Safety, Legal, Brand Protection, Quality, Asset and Profit Protection, Responsibility)

Risk Appetite

This year, we have strengthened our definition of risk appetite and integrated this into our wider risk management framework to support better decision making. This exercise was reviewed and validated by the Board and, going forward, will be performed on an annual basis.

We will pursue growth and are prepared to accept a certain level of risk to firmly establish our position in luxury fashion and inspire our customers with our unique British attitude. We operate in a competitive, dynamic sector with long‑term growth potential. Within categories of risk our tolerance for risk may vary.

Complying with applicable laws and doing the right thing is part of our culture and underpins our strategic ambition. In exploring risks and opportunities, we prioritise the interests and safety of our customers and employees and we seek to protect the long-term value and reputation of the brand, maximising commercial benefits to support responsible and sustained growth, and in doing so minimise risk.

OUR PRINCIPAL RISKS

Our risk management process has identified a broad range of risks and uncertainties, which we believe could adversely impact the profitability or prospects of the Group. Our principal risks are defined as those that we regard as the most relevant to our business. These are the risks that we see as most material to our performance and could threaten our business model or the future long-term performance, solvency or liquidity of Burberry.

Our risk management framework is structured along the following categories of risk: Strategic and Financial, Operational, Compliance and External. Each principal risk is linked to one of these categories and may impact one or more of our strategic pillars.

We have updated the descriptions and mitigating actions of several of our principal risks to reflect the new strategic priorities that have been announced. We have also reviewed whether the level of risk associated with each of the principal risks is increasing or decreasing compared to last year and noted new risks which do not have a comparison.

STRATEGIC AND FINANCIAL RISKS

EXECUTION OF STRATEGIC PLAN

Focused execution of the strategy through our six Strategic Pillars: Product, Communication, Distribution, Digital, Operational Excellence and Inspired People is key to sustainable shareholder value. Success depends on the value and relevance of our brand to global luxury consumers around the world and our ability to innovate. Failure to execute these strategies successfully could result in under‑delivery of the expected growth, productivity and efficiency targets. This could have a significant impact on the value of the business and market confidence that we can deliver the strategy. We operate in the global luxury market, where competition is intensifying. Today's luxury customers demand creativity, curation, excitement, innovation and personalisation at every turn. Our ability to make the right strategic investment decisions in response to these changes is vital to our success. Change from FY 2016/17:  During the year we have focused on building the team to develop and deliver our strategy and detailed plans.
Link to strategy	Actions taken by management
All strategic pillars.	·      Throughout the year we have focused on building the capabilities to develop and deliver our strategy. The Executive Team is accountable for the conduct of these programmes and delivery of outcomes in accordance with our Board-approved plan. ·      A Transformation Management Office coordinates delivery of the programme, monitoring risks of each of the major programmes and tracking progress and benefits. ·      During FY 2017/18 we introduced a new assortment of products and full looks to inspire the new fashion consumer, launched our new line of leather goods and appointed a new Chief Creative Officer. ·      We have increased our focus on digital and social channels. We started our content revolution in 2017 and re-launched our website, burberry.com, in early 2018. ·      Our Inspired People initiative includes targeted programmes to inform and engage employees about the strategy, develop leadership capabilities and drive the right behaviours. ·      Our Operational Excellence programme is in progress as demonstrated by the successful opening of Burberry Business Services in Leeds. ·      There is a clear IT strategy prepared by the Chief Information Officer and IT Leadership Team comprised of a portfolio of IT projects linked to the Company's strategic objectives.
Risk tolerance
We will pursue growth and accept a certain level of risk to ignite brand heat and firmly establish our position in luxury fashion. We approve capital investment in strategic projects and accept moderate to high earnings volatility in pursuit of innovation and profitable growth, balancing a reasonable return on capital with a reasonable level of commercial risk within the approved capital allocation framework.
Examples of risks
Firmly positioning the brand in luxury is dependent on creating new and innovative luxury products that excite our global customers. If we are unable to innovate effectively and introduce these new products to the market with speed, our sales or margins could be adversely affected. Our development and deployment of content through communication channels does not create sufficient brand heat globally. We do not achieve the required organisational alignment and enhance our capabilities and culture to compete and grow effectively at the pace required to deliver the targets. Failure to sufficiently transform operational processes undermines our ability to deliver the required cost savings and margin improvements. Failure to deliver the technology innovation required to empower changes in the Group's business model and to deliver the anticipated benefits from key investment strategies in Digital, Retail and Group operations.

FOREIGN EXCHANGE

Volatility in foreign exchange rates could have a significant impact on the Group's reported results. Burberry is exposed to uncertainty through foreign exchange movements. Change from FY 2016/17: No change
Link to strategy		Actions taken by management
Volatility in foreign exchange rates may impact our overall financial performance.		·      The Group seeks to hedge anticipated foreign currency transactional cash flows using financial instruments. These are mainly in the Group's centralised supply chain and wholesale business. The Group does not hedge intra-group foreign currency transactions at present. ·      The Group monitors the desirability of hedging the net assets of non-Sterling subsidiaries when translated into Sterling for reporting purposes; we have only entered into modest transactions for this purpose in the current and previous year. ·      The Group monitors the overall impact of unhedged exchange movements and provides guidance to shareholders of the effect of exchange rate movements on a quarterly basis.
Risk TOLERANCE
The Group does not currently seek to manage structural foreign exchange risk relating to intercompany transactions with its overseas retail operations.
Examples of risks
The Group operates on a global basis and earns revenues, incurs costs and makes investments in a number of currencies. The Group's financial results are reported in Sterling. Most reported revenues are earned in non-Sterling currencies, with a significant proportion of costs in Sterling. Therefore, changes in exchange rates which are driven by several factors, such as global economic trends, Brexit or other developments, can impact the Group's revenues, margins, profits and cash flows.

OPERATIONAL RISKS

LOSS OF DATA OR CYBER ATTACK

A cyber attack results in a system outage, impacting core operations and/or results in a major data loss leading to reputational damage and financial loss. The Group's technology environment is critical to success. A robust control environment helps decrease the risks to core business operations and/or major data loss. Change from FY 2016/17:  No change
Link to strategy		Actions taken by management
Having a resilient technology landscape is integral to delivering our Operational Excellence and Digital strategic pillars.		·      Established a cross‑functional Cyber Security Steering Group with Executive membership and sponsorship. ·      Continued investment in the cyber security programme and completion of independent risk assessments to validate the strategy and identify capabilities required to achieve the appropriate levels of security. ·      Cyber security status reporting through monthly scorecards reported to Executive and IT Management. ·      Security Monitoring, which provides monitoring of the network and computers 24/7, 365 days a year, supported by robust security incident response processes. ·      Creation of an Information Security Advisory function to embed security in new projects and initiatives. ·      Development of a Security Training and Awareness campaign rolled out to employees. ·      GDPR and Social Media Privacy Steering Group, a cross‑functional group that meets monthly to review data controls around existing systems as well as assess the potential data risks (from both a legal and reputational perspective) associated with new IT, Marketing, Retail and Digital initiatives across the Group. ·      Creation of the Data Protection office to monitor internal processes and ensure policies are adhered to in respect of the collection, security, storage, retention and privacy of data.
Risk TOLERANCE
Protecting the brand and its reputation globally is at the heart of everything we do. We have a low tolerance and take a risk averse approach, adopting a strategy to avoid or mitigate any reputational/brand risk.
Examples of risks
Denial of service resulting in disruption of business activities. An external hacker exploits a security vulnerability resulting in a loss of system control and/or major data loss. A malicious insider abuses privileged access to gain entry to sensitive information and/or conduct unauthorised activities. Malware results in a loss of system control causing business disruption and/or major data loss. Fines due to failure to prepare for the General Data Protection Regulations (GDPR).
Inability to attract, motivate, develop and retain our people to perform to the best of their ability in order to meet our strategic objectives. Change from FY 2016/17:  No change
Link to strategy		Actions taken by management
Delivery of our strategy relies on our ability to ensure our people continue to be driven and inspired to deliver outstanding results for the Group. This is done through fostering a dynamic and inclusive culture where all employees feel engaged; empowering and equipping our leaders; strengthening capabilities and expanding our talent plans; simplifying how we work; and driving positive change and a more sustainable future across every part of our Group's footprint.		·      Our Board and Audit Committee regularly review key talent and resource risks. ·      Global campaign, run by our leaders, to inform and engage our people around the strategy and behaviours. ·      Codification and roll-out of aligned Burberry Behaviours, embedded in performance management and incorporated into strategy campaign. ·      A global employee engagement survey was carried out this year with specific action plans now in progress to address the results. Focus on visible engagement moments including Burberry Disrupted pilot and global CEO Town Hall for strategy launch. ·      Creation of, and execution against, capability maps including new hires to address immediate priority gaps. ·      Introduction of simplified, more effective new performance management process across the business. ·      Roll out of Powerful Conversations training to upskill line manager coaching capability and drive performance. ·      A new leadership development programme has been built around Burberry Behaviours, to engage and equip leaders - first intervention Summer 2018. ·      Our Executive Team ensures there is a competitive total reward offering, both financial and non-financial, to retain our people and to attract new hires.
Risk tolerance
We recognise the value and importance of successfully delivering our Inspired People strategy and therefore have a low tolerance for risk in this area.
Examples of risks
Failure to engage or equip our teams to deliver our strategy, or address key capability gaps. Failure to build the right capabilities and behaviours in our leadership population. Loss of critical talent/knowledge/unmanageable levels of attrition due to ongoing transition period/change fatigue. The long-term impact of Brexit on the Group's EU workforce is still unknown.

IT OPERATIONS

IT Operations fail to support critical processes across the Company including Retail, Digital and Group functions such as Supply Chain and Finance. Change from FY 2016/17:  No change
Link to strategy		Actions taken by management
All strategic pillars.		·      A strengthened team across the IT function has been put in place with clearer alignment of the IT teams to the strategy, the business functions and operations. ·      Controls to maintain the continuity of the Group's IT systems are in place, including business continuity and IT recovery plans which would be implemented in the event of a major failure. ·      A tested Group incident management framework is in place to review, report and close high-impact events. ·      Programmes that will improve IT's ability to support operations are in place with a clear portfolio of IT projects linked to the Company's strategic objectives. Delivery of these projects is overseen by our IT Portfolio Forum which regularly monitors progress.
Risk TOLERANCE
In operating our business and managing the possible disruption to our IT operations, we have a low tolerance for risk.
Examples of risks
Failure to provide technology platforms that meet customer demands and support innovation can result in failure to deliver the strategy and loss of revenue. Failure to provide stable and resilient technology platforms that meet business demands can result in failure to deliver the strategy and negatively impact operations due to poor system performance and/or system outages.

SUSTAINABILITY AND CLIMATE CHANGE

The success of our business over the long term will depend on the social and environmental sustainability of our operations, the resilience of our supply chain and our ability to manage any potential climate change impacts. To address long-term sustainability challenges and understand potential impacts of climate change on our business, in both operational and financial terms, an exercise is in progress, facilitated by a third party, to explore future trends and climate change scenarios and consider how they could affect our business model. This exercise will inform the development of cross-functional action plans to help mitigate long-term risks and future-proof our business. Change from FY 2016/17: New
Link to strategy		Actions taken by management
Our commitment to being an industry leader in responsible, sustainable luxury is embedded in our Product and Inspired People strategic pillars. This underpins and supports our strategic focus to establish ourselves firmly in luxury fashion and deliver sustainable, long-term value.		·      Our Chief People, Strategy and Corporate Affairs Officer is responsible for ethical trading, community investment and environmental sustainability matters and regularly reports on these topics to the Management Risk Committee and the Board. ·      A new responsibility strategy was launched in June 2017, setting ambitious five-year goals: to drive positive change through all products, to become carbon neutral, to revalue waste, and to positively impact one million people by 2022. ·      Long-standing responsibility programmes are continuously reviewed and improved. Our Ethical Trading Programme focuses on ensuring labour and human rights standards are met, while our new strategy takes us beyond compliance to enhance worker wellbeing and livelihoods in our supply chain. Our Energy & Water Reduction Programme continues to drive resource efficiency in our direct and indirect operations, while our new strategy includes a commitment to switch to 100% renewable energy by 2022. ·      Alternative, high quality and sustainable materials are being continuously explored and used in our product range. A new Burberry Foundation partnership with the Royal College of Art focuses on driving innovation and creating more sustainable materials and processes for our industry. ·      As part of our new responsibility strategy for 2022, we aim to positively impact one million people in the communities sustaining our industry. To achieve this, we have supported the Burberry Foundation in setting up long-term community programmes with leading organisations, focused on enhancing youth employability, community cohesion and sustainable farming.
Risk TOLERANCE
We have a low tolerance for risk when protecting the human and environmental resources we depend on. However, given the long-term nature of some sustainability risks and the significant level of uncertainty associated with their occurrence and potential impact, we accept that some risks are inevitable. We are therefore focused on helping to minimise global risks while building resilience in our operations and supply chain.
Examples of risks
Resource scarcity, coupled with increasing demand, could affect production, availability, quality and cost of raw materials. Increased frequency of extreme weather events, from floods to droughts, could cause disruption in our supply chain and impact the sourcing of raw materials, as well as the production and distribution of finished goods. Increased regulation and more stringent environmental standards could impact our business by affecting production costs and flexibility of operations. Our industry is sustained by many agricultural and manufacturing communities around the world. Failure to support them in preserving key skills and building more sustainable livelihoods could cause social, economic and operational challenges, ranging from community tensions and disruption to production, to a reduced talent pool.

BUSINESS INTERRUPTION

A major incident at one of the Group's main locations, at its suppliers or affecting key products, which significantly interrupts the business. This could be caused by a wide range of events including natural catastrophe, fire, terrorism, or quality control failures. Change from FY 2016/17:  This risk has increased due to the expansion at the Group's largest distribution centre.
Link to strategy		Actions taken by management
Our Product and Distribution strategies enable us to operate effectively and efficiently, delivering Operational Excellence through continuity of supply of compliant products and services of the highest quality to our customers. Ensuring our ability to continually operate key sites and factories to develop, manufacture, distribute and sell our products is a key strategic priority.		·      We have policies and procedures designed to ensure the health and safety of our employees and products and to deal with major incidents, including business continuity and disaster recovery. ·      The Group continues to evolve its supply chain organisational design to develop its manufacturing base, reducing dependence on key sites and vendors. ·      A Group incident management framework is in place to ensure that incidents are reported and managed effectively. Across the Group, our Incident Management Teams managed 34 incidents in the year. Ten of these related to severe weather warnings, including Hurricanes Harvey and Irma in the USA. Nine related to potential terrorist incidents in cities where we have stores or employees and we moved quickly to ensure our customers, employees and assets remained safe and secure. The remainder covered a range of more minor issues including loss of utilities. In addition, our Group Incident Management Team took part in training and incident management exercises involving large parts of the Group, our customers, shareholders and media relations function. Our plans as tested during the year were found to be effective. ·      Our product suppliers and vendors are subject to a quality control programme which includes regular site inspections and independent product testing. ·      Robust security arrangements are in place across our store network to protect people and products in case of security incidents. ·      Full business continuity plans are in place for our ten main sites including the three major distribution centres and our two factories. Business continuity plans have been established and tested at Burberry Business Services in Leeds. The Group's key IT systems are protected to prevent and minimise any potential interruption. This includes resilient design and the provision of disaster recovery services to continue operating within pre-agreed times in case of a major incident. Our plans as tested during the year were found to be effective. ·      Management regularly review and manage business continuity and disaster recovery risks recognising that these plans cannot always ensure the uninterrupted operation of the business, particularly in the short term. ·      A comprehensive insurance programme is in place to offset the financial consequences of insured events, including fire, flood, natural catastrophes and product liabilities.
Risk TOLERANCE
We have a low tolerance for risk in this area, particularly in respect of product safety and quality.
Examples of risks
Burberry operates two owned factories and a global network of storage and distribution hubs. These face typical property risks, such as fires, floods and terrorism. Burberry works with several suppliers of luxury goods who would be difficult to replace quickly. Their loss could interrupt core products or a seasonal range. A serious product quality issue could result in a product recall.

COMPLIANCE RISKS

REGULATORY RISK & ETHICAL/ENVIRONMENTAL STANDARDS

The Group's operations are subject to a broad spectrum of national and regional laws and regulations in the various jurisdictions in which we operate. These include product safety, trademarks, competition, employee and customer health & safety, data, corporate governance, employment and tax. Changes to laws and regulations or a major compliance breach could have a material impact on the business. Change from FY 2016/17:  This risk has increased due to the increasing regulatory requirements in the year, e.g. General Data Protection Regulations (GDPR).
Link to strategy		Actions taken by management
Compliance with applicable laws and regulations and doing the right thing underlie all our strategic pillars.		·      The Group monitors and seeks to continuously improve processes to gain assurance that its licensees, suppliers, franchisees, distributors and agents comply with the Group's contractual terms and conditions, its ethical and business policies and relevant legislation. ·      Specialist teams at corporate and regional level, supported by third-party specialists where required, are responsible for ensuring employees are aware of regulations relevant to their roles. ·      Assurance processes are in place to monitor compliance in a number of key risk areas, with results being reported to our Ethics Committee, Management Risk Committee and Audit Committee. ·      We have an established framework of policies that aim to drive best practice across our direct and indirect operations, including our Responsible Business Principles and Global Environmental Policy. Policies are available at www.burberryplc.com, are owned by senior leadership, issued to all supply chain partners and implementation monitored on a regular basis. ·      We have established a GDPR Steering Committee to oversee compliance with GDPR legislation. ·      International tax reform is a key focus of attention. ·      Roll out of annual mandatory training to all employees and to targeted functions to ensure awareness and compliance with our policies governing anti-bribery and anti-corruption (ABAC), insider dealing, annual conflict declarations, including, anti-bribery and anti-corruption training, insider dealing, annual conflict declarations, criminal finances, anti-money laundering and privacy. ·      Our culture and policies encourage employees to speak up and report any issues without fear of retribution. A global confidential employee helpline is in place in substantially all countries where we have retail and corporate locations, and where it is legally permitted. All calls and emails are logged and independently reviewed and followed up. During the year 110 cases were received and the results and themes are reviewed at the Ethics Committee. No significant issues were identified from these cases during the year. ·      In accordance with our ABAC policy, annual training is required to be performed. This year the annual e-learning module was rolled out to all corporate staff and manufacturing and retail employees of manager level and above, a total of 2,978 employees. The training reached a 99% completion rate. Any incidents or potential areas of concern are investigated by highly experienced investigators in our Asset Profit and Protection team and ABAC risks are covered as part of the scope of Internal Audit reviews. During the year there were no material ABAC related issues.
Risk TOLERANCE
In complying with laws and regulations, including customer, employee safety and bribery and corruption, we have a low tolerance for risk.
Examples of risks
Regulatory non-compliance. Failure by the Group or associated third parties to act in an ethical manner consistent with our code of conduct and our responsibility strategy, for example with regard to model wellbeing. Non-compliance with labour, human rights and environmental standards across our own operations and extended supply chain would go against our Responsible Business Principles and could result in financial penalties, disruption in production and reputational damage to our business. Failure to prepare for the GDPR. Tax is a complex area where laws and their interpretations are changing regularly leading to the risk of unexpected tax and financial loss exposures.

INTELLECTUAL PROPERTY

Sustained breaches of Burberry's intellectual property (IP) rights or allegations of infringement by Burberry. Counterfeiting, copyright, trademark and design infringement in the marketplace can reduce the demand for genuine Burberry merchandise. Change from FY 2016/17:  No change
Link to strategy		Actions taken by management
Protecting the integrity of the brand, safeguarding and elevating its luxury position, complying with applicable laws and regulations, and doing the right thing underlie all our strategic pillars.		·      The Group's global Brand Protection team is responsible for the Group's brand protection efforts globally, including in the digital environment. Where infringements are identified these are addressed through a mixture of criminal and civil legal action and negotiated settlements. ·      IP rights are driven largely by national laws which afford varying degrees of protection and enforcement priorities depending on the country. ·      Trademark registrations globally across all appropriate categories. ·      The Brand Protection team partners closely with the design and merchandising teams to ensure that our products do not infringe the rights of third parties. ·      Exploring new and emerging threats and ways to combat threats. ·      Inspiring Burberry associates and partners to engage with us in protecting our brand. ·      Partnering with enforcement agencies and our digital partners to minimise the visibility of counterfeit and parallel trade products both online and offline. ·      Disrupting the flow of counterfeit products by enforcing to source level.
Risk tolerance
We have a low tolerance for risk in protecting the integrity of the brand, asserting our IP rights and minimising parallel trade while ensuring due respect is given to the IP rights of others.
Examples of risks
Counterfeiting, parallel trade, copyright, trademark and design infringement in the marketplace can reduce the demand for genuine Burberry merchandise and impact on revenues. Unauthorised use of trademarks and other IP, as well as the unauthorised sale of Burberry products and distribution of counterfeit products, damages the Burberry brand image and profits. Allegations from third parties of IP infringement by Burberry could result in significant damages claims, financial loss through withdrawing infringing products and negatively impact Burberry's reputation.

EXTERNAL RISKS

MACRO‑ECONOMIC AND POLITICAL INSTABILITY

The Group operates in a wide range of markets and is exposed to changing economic, regulatory, social and political developments that may impact consumer demand, disrupt operations and impact profitability. Adverse macro‑economic conditions or country-specific changes to the operating or regulatory environment or civil unrest may impact spending habits of key consumer groups such as the Chinese consumer and cause increased operational costs. Change from FY 2016/17:  No change
Link to strategy		Actions taken by management
Volatility in the external environment may impact our overall financial performance and operations.		·      Our global reach helps to mitigate reliance on particular consumer groups. We continue to focus on engaging with the Chinese luxury consumer, both in China and while travelling abroad. In addition, our brand has wide appeal across multiple consumer segments, including a broad set of ages and preferences. ·      The risk associated with North Korea is outside our control. Korea is a key region for the overall business and the situation is being monitored by the Group Incident Management Team.
Risk tolerance
We have a low to moderate tolerance for risk in this area but recognise external factors are difficult to mitigate as they are often outside our control.
Examples of risks
The strategy does not address the changes created by macro‑economic trends and uncertainty in the outlook for the luxury sector globally or within significant consumer groups, e.g. Chinese consumers. Increased political instability and tension caused by the situation in North Korea may cause increased operational costs.

BREXIT

Various Brexit scenarios could impact the Group's financial position, supply chain and people. Change from FY 2016/17: New
Link to strategy		Actions taken by management
Volatility caused by Brexit uncertainty may impact our overall financial performance.		·      A transitional arrangement potentially offers some temporary relief to December 2020 and, assuming agreement, should provide 18 months' more time for mitigation planning and implementation. ·      Our Brexit Steering Committee continually monitors the evolving impact of Brexit and oversees our response. ·      AEO accreditation would mitigate supply chain risks and continues to be pursued. ·      Engagement with UK government departments to ensure they are fully informed of our circumstances and concerns, through appropriate representation.
Risk tolerance
Although we have a low tolerance for risk caused by Brexit there is still uncertainty about the long‑term impact.
Examples of risks
Additional customs duty from the cessation of existing free trade agreements and VAT cash flow costs at the new UK trade border. Impact on some current business roadmaps. Extended supply lead times increasing working capital. Uncertainty over the rights of EU nationals which has increased the risk of losing talent. Exchange and interest rate volatility impacting Group revenues, margins, profits and cash flow.

 

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