Final Results - Part 1

RNS Number : 3629V

Burberry Group PLC

28 May 2008

Burberry Group plc

Preliminary results

for the year ended 31 March 2008

Burberry Group plc, the global luxury company, today announces its results for the year ended 31 March 2008.

Angela Ahrendts, Chief Executive Officer, commented:

'Burberry's 18% revenue growth and 14% profit increase demonstrate the robustness of our global luxury business in these challenging times, with consistent performance across our regions, channels and products. Brand momentum remains strong and we are investing in the future, continuing to grow and innovate our iconic outerwear, while developing exciting new businesses such as shoes, jewellery and childrenswear.'

	Year to 31 March		% change
£ million	2008	2007	reported	underlying #
Revenue	995.4	850.3	17	18

Adjusted operating profit *	206.2	185.1	11	14
Operating profit	201.7	157.0	28	32
Profit before taxation	195.7	156.3	25

Diluted EPS (pence)	30.5	24.7	23
Adjusted diluted EPS (pence)*	31.6	29.1	9

Dividend per share (pence)	12.0	10.5	14

* 'Adjusted' refers to profitability measures calculated before:

1. Atlas costs of £19.6m (2007: £21.6m) which relate to the Group's infrastructure redesign initiative announced in May 2005.

2. Plant closure costs of nil in 2008 (2007: £6.5m).

3. Net profit of £15.1m (2007: nil) relating to the relocation of global headquarters.

# Underlying change is calculated at constant exchange rates.

Certain financial data within this announcement have been rounded.

Operational highlights

Consistent double-digit underlying revenue growth by region, channel and product
- 26% growth in Europe and Americas; Asia Pacific up 17%
- 20% growth in retail and wholesale
- 39% growth in non-apparel; womens and mens up double-digit

Retail 49% of sales; opened net
- 20 mainline stores
- 49 concessions
- 10 franchise stores in Emerging Markets

Non-apparel 32% of retail/wholesale revenue (up from 28% in 2007)
- Success in luxury handbags and shoes

Continued transformation of back of house operations
- SAP core system built and deployed in corporate functions and European retail
- Sourcing gains achieved
- Direct deliveries to US started

Financial highlights

Total revenue of £995m, up 18% underlying

For retail and wholesale combined
- Revenue up 20% underlying
- Adjusted operating profit up 23% underlying
- Operating margin up 30 basis points to 14.9%

Adjusted operating profit including licensing of £206.2m, up 14% underlying

Reported profit before tax of £195.7m, up 25%

Adjusted diluted EPS of 31.6 pence, up 9%

Full year dividend of 12 pence per share, up 14%

Enquiries

Burberry		020 7968 5919
Stacey Cartwright	Chief Financial Officer
Fay Dodds	Director of Investor Relations

Brunswick		020 7404 5959
David Yelland
Laura Cummings
Robert Gardener

There will be a presentation today at 9am (UK time) to analysts and investors at the Merrill Lynch Financial Centre, 2 King Edward Street, London, EC1A 1HQ. The presentation can be viewed live on the Burberry website (www.burberryplc.com) and can also be accessed live via a dial-in facility on 44 (0)20 7081 7194. The supporting slides and an indexed replay will also be available on the website later in the day.

Burberry will update on trading on 15 July 2008 when it will issue its Interim Management Statement in respect of the First Quarter.

Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from any expected future results in forward-looking statements.

This announcement does not constitute an invitation to underwrite, subscribe for or otherwise acquire or dispose of any Burberry Group plc shares. Past performance is not a guide to future performance and persons needing advice should consult an independent financial adviser.

BUSINESS AND FINANCIAL REVIEW

Continued to execute against five key strategic initiatives

In the year to March 2008, Burberry grew revenue by 18% and adjusted operating profit by 14% on an underlying basis. There was further evolution in the front end of the business, with growth in the top part of the product pyramid, a record number of store openings and increased non-apparel penetration. The back of house infrastructure and processes were further upgraded, especially in IT, supply chain and logistics.

All of this was achieved in an external environment that became increasingly challenging during the second half. Against this background, Burberry continued to deliver operational efficiencies, while maintaining the strong momentum of the brand with consumers worldwide.

Leveraging the franchise

Historically, Burberry was a collection of decentralised regions and business units, each with an independent approach in areas such as design, merchandising and supply chain. Over the last year, continued progress has been made in working as one company and one brand - with a more cohesive global advertising campaign, small apparel licences brought in house and further strengthening of the regional and corporate teams.

Outerwear, which is the cornerstone of the brand, continues to show strong growth, driven by product and fabric innovation, the launch of Burberry Sport and packables and global replenishment for top styles. For Autumn/Winter 2008, the penetration of outerwear as a proportion of sales is expected to increase by several percentage points for both womenswear (to over 50% of category sales) and menswear (to over 40% of category sales).

Intensifying non-apparel development

In the year to March 2008, non-apparel sales increased by 39% on an underlying basis, generating 32% of retail and wholesale revenue - up from 28% in 2007. Luxury handbags continued to perform strongly and sales of shoes more than doubled in the year. Soft accessories benefited from increased product innovation, especially in the use of the iconic check. Jewellery was launched for Spring/Summer 2008 and luggage is being tested in Autumn/Winter 2008. Investment in these categories continues, adding dedicated teams in product development and sourcing, for example.

Accelerating retail-led growth

During the year, a record number of Burberry stores were opened - a net 20 mainline stores, 49 concessions and 10 stores operated under franchise. These included directly-operated mainline stores in key luxury markets such as Florence, Italy, the Beverly Center, Los Angeles and Aspen, Colorado; more concessions in prestige department stores in London, Milan, Dublin and Korea; and franchise stores in high potential markets including Russia and the Middle East.

The culture of Burberry continues to move from a traditional wholesale structure to a more dynamic retail mindset. Initiatives include more frequent flow of products and basic replenishment, which are benefiting the group's retail stores as well as its wholesale and licensing partners.

Investing in under-penetrated markets

North America remains a key target market for Burberry. Revenue increased by 26% on an underlying basis in the year to March 2008, with strong growth in both the wholesale and retail channels. In 2008/09, Burberry plans to open 8-10 mainline stores, refurbish several of its higher profile stores including Beverly Hills, Los Angeles and the Venetian, Las Vegas, while further upgrading its wholesale offer, especially in new categories such as childrenswear and shoes.

Wholesale revenue from Emerging Markets, which include China, the Middle East, Eastern Europe, Russia, Brazil and India, increased by over 50% in the year, with strong double-digit comparable store sales growth in these franchised stores. Ten stores were opened during the year, including three in Russia, one in Saudi Arabia and a third store in Turkey. Burberry plans to open about 15-20 stores in conjunction with its franchisees in 2008/09, weighted towards the second half, in locations including South Africa and India.

Pursuing operational excellence

As highlighted in the Interim Management Report in November 2007, Burberry faced an intense period of activity in the second half of the year. The business continued to experience high volume growth driven by the strength of its product designs. At the same time, the group was in the most demanding phase of implementing its new IT infrastructure (SAP), while also rapidly evolving its global supply chain and logistics functions.

During the second half, the new SAP platform was used to sell, procure and ship Spring/Summer 2008 products and the retail selling system in Europe (excluding Spain) was implemented. Although typical data and process issues arose, the project is now starting to deliver very early benefits, especially in the core central product and merchandising functions. Full rollout to the US and much of Asia is planned during the year to March 2009. The wider Atlas programme, which included improving business processes as well as the SAP implementation, has delivered the targeted cumulative £20m benefit to profits, mainly through supply chain efficiencies.

Outlook

Retail

In the year to March 2009, Burberry expects average selling space to increase by 12-13% year-on-year, including about 15 mainline store openings.

Wholesale

Based upon orders received to date, Burberry expects wholesale revenue in the six months to September 2008 to increase by around 10% on an underlying basis. Spain is expected to show further weakness offset by good growth in all other regions, especially North America (up by over 20%) and Emerging Markets.

Licensing

In the year to March 2009, Burberry again expects broadly flat underlying licensing revenue, with modest volume growth in apparel in Japan and good volume growth from global product licences, offset by the non-renewal of certain other licences. The impact of the Yen exchange rate on reported revenue and profit is expected to be about £2m favourable.

Capital expenditure

In the year to March 2009, Burberry expects capital expenditure to be between £90m and £95m (2008: £49m). As previously disclosed, this includes the costs of fitting out the new global headquarters and showrooms (Horseferry House) which will be between £20m to £25m in total. The balance is broadly equally split between new stores, store refurbishments (including Beverly Hills, Los Angeles and Knightsbridge, London) and other spend, including supply chain and IT projects.

Net debt

Burberry had net debt of £64.2m at 31 March 2008 (30 September 2007: £89.2m; 31 March 2007: £2.8m). The net interest charge for the year to March 2008 was £6.0m. A higher charge is expected for 2009 as average net borrowings for the year exceed the year-end debt position, due in part to the seasonality of the business.

Going forward, the Board now believes it is appropriate to carry year-end net debt of up to about £100m, enabling Burberry to return any funds not required for investment in the business to shareholders through share buybacks.

Group financial highlights

Revenue of £995m, up 18% on an underlying basis, 17% reported. Exchange rates reduce revenue by £12m.

Adjusted operating profit of £206.2m, up 14% on an underlying basis, 11% reported. Exchange rates reduce adjusted operating profit by £5.0m.

Adjusted operating margin of 20.7%, or 21.0% at constant exchange rates (2007: 21.8%), as proportion of revenue from high margin licensing declines.

Adjusted retail/wholesale operating margin up to 14.9% (2007: 14.6%).

Profit before tax up 25% reported, after Atlas costs of £19.6m and £15.1m net profit relating to the relocation of global headquarters.

Reported tax rate of 30.9% (2007: 29.5%, including a 1.5% one-off benefit).

Adjusted diluted EPS of 31.6p, up 9%, reflecting operating profit growth partly offset by a higher interest charge and tax rate.

Final dividend of 8.65p per share giving 12.0p for the full year, as the payout ratio is moved progressively towards 40%.

	Year to 31 March		% change
£ million	2008	2007	reported	underlying
Revenue	995.4	850.3	17	18

Cost of sales	(377.7)	(329.0)	(15)
Gross margin	617.7	521.3	18
Adjusted operating expenses	(411.5)	(336.2)	(22)
Adjusted operating profit	206.2	185.1	11	14

Atlas costs	(19.6)	(21.6)
Plant closure costs	-	(6.5)
Relocation of headquarters	15.1	-
Operating profit	201.7	157.0	28	32

Net finance charge	(6.0)	(0.7)
Profit before taxation	195.7	156.3	25
Taxation	(60.5)	(46.1)	(31)
Attributable profit	135.2	110.2	23

Adjusted EPS (pence)	31.6	29.1	9
EPS (pence)	30.5	24.7	23
Diluted weighted average number of ordinary shares (millions)	442.8	446.1

EPS is calculated on a diluted basis.

Revenue analysis

Revenue by channel of distribution

	Year to 31 March		% change
£ million	2008	2007	reported	underlying
Retail	484.4	410.1	18	20
Wholesale	426.2	354.1	20	20
Licensing	84.8	86.1	(2)	3
Total	995.4	850.3	17	18

Retail

Retail sales grew by 20% on an underlying basis (18% reported) in the year, contributing 49% of total revenue.

Comparable store sales grew by 8% (11% in H1; 6% in H2), with the economic environment becoming more volatile as the second half progressed. Growth came from successful product innovation, a more frequent flow of new goods and replenishment. Luxury handbags and outerwear performed particularly well, contributing to a further increase in the average unit retail price in mainline stores.

There was double-digit comparable store sales growth in the United States, with strong performances in major metropolitan areas and tourist cities. Europe and Asia Pacific showed positive comparable store sales growth, with France, Italy and Hong Kong among the strongest markets.

Year-on-year average selling space increased by 12% and the total net selling space at 31 March 2008 was approximately 740,000 square feet. During the year, Burberry opened a net 20 mainline stores, bringing the total to 97 stores globally. The number of concessions in prestige department stores increased by 49, including additional and upgraded concession corners in Korea and the conversion to retail of 20 babywear corners in Spain. Store refurbishments continued, increasing selling capacity, sales efficiency and improving aesthetics.

Wholesale

Wholesale revenue, which contributed 43% of total sales in the year, increased by 20% on an underlying and reported basis. By region, Europe, North America and Emerging Markets had the strongest growth, while Spain remained down year-on-year.

Wholesale momentum reflects both the strength of Burberry's product designs, as well as its more dynamic, retail-led model, with a more frequent flow of product to customers and inventory now available to replenish core styles during a selling season. Wholesale revenue grew by 16% in the first half of the year to March 2008, increasing to 25% in the second half. This performance builds on 17% growth in the second half of the financial year 2006/07.

In North America, sales of core categories such as outerwear grew strongly, reflecting increasing penetration in existing doors. New doors were selectively added in major department stores in categories such as handbags, shoes and Prorsum.

Licensing

Total licensing revenue in the year increased by 3% on an underlying basis (down 2% reported). The weakness of the Yen reduced reported revenue by £5.4m in the year, although this was partly compensated for by the strength of the Euro in the second half.

There was modest growth in Japan in both apparel and non-apparel and global product licensees delivered strong growth. New products included Burberry The Beat and Brit Sheer fragrances, as well as Black Label eyewear in Japan, appealing to a young, male consumer. As part of Burberry's strategy to move to a more consistent global product offer, certain licences, predominantly in menswear, were not renewed, which reduced revenue by £1.7m.

Revenue by region

Revenue by origin of business

	Year to 31 March		% change
£ million	2008	2007	reported
Europe*	364.5	270.7	35
Spain	172.8	173.9	(1)
Americas	231.6	192.6	20
Asia Pacific	226.5	213.1	6
Total	995.4	850.3	17

* Excluding Spain

Retail/wholesale revenue by destination

	Year to 31 March		% change
£ million	2008	2007	reported	underlying
Europe*	291.8	229.8	27	26
Spain	161.6	151.8	6	1
Americas	234.8	196.5	19	26
Asia Pacific	189.1	167.5	13	17
Rest of World	33.3	18.6	79	79
Total retail/wholesale	910.6	764.2	19	20

* Excluding Spain

The comments below refer to revenue by destination which better reflects the regional demand for Burberry products.

Europe

Revenue in Europe increased by 26% on an underlying basis (27% reported), with Italy and Germany among the best performing markets. Retail and wholesale revenue both grew by over 20%, helped by the strength of product designs, newly opened stores and new and refurbished concessions. Wholesale revenue accounted for just over half of the region's sales.

Spain

Revenue in Spain was up 1% on an underlying and 6% on a reported basis.

Retail sales accounted for nearly 40% of Spain's revenue, with the majority coming from over 100 women's, non-apparel and childrenswear concessions. Comparable store sales were strongly ahead in the first half of the year, but reversed sharply in the second half, falling year-on-year. This reflects a more difficult economic environment in Spain.

Wholesale revenue in the year continued to trend down, reflecting the challenging external environment and the ongoing decline of small independent retailers in Spain. The majority of wholesale revenue comes from selling to about 1,000 multi-brand accounts.

For 2008/09, Burberry is planning on the basis of no improvement in the Spanish economy or retail environment over that seen in the second half of 2007/08. Burberry continues to implement a series of initiatives in Spain - further evolving the product offer and integrating the brand and infrastructure, including the supply chain, more closely with its global business. Childrenswear is one of the group's key growth opportunities and the existing team in Spain is being strengthened to help capitalise on this.

Americas

Americas revenue increased by 26% on an underlying basis (19% reported). There was over 20% underlying growth in the retail channel, which accounts for more than two-thirds of Americas revenue, and exceptional growth in wholesale, driven in both channels by increasing productivity of existing space and new stores and doors.

Asia Pacific

Asia Pacific revenue increased by 17% on an underlying basis (13% reported). Retail and wholesale channels grew roughly equally (retail accounted for over half of the region's revenue).

During the year, significant progress was made in realigning the region under one strengthened management team (historically it reported as eight separate businesses). In Korea, Burberry's largest Asian market outside Japan, the distribution of the brand has been refined, luxury handbags are now 40% of handbag sales (up from 17% a year ago) and concessions are being relocated and refurbished - an initiative which will continue in the current year. Hong Kong remains a strong market for Burberry, with double-digit comparable store sales growth in the year, led by continued focus on non-apparel and outerwear and increased tourism from mainland China.

Retail/wholesale revenue by product category

	Year to 31 March		% change
£ million	2008	2007	reported	underlying
Womenswear	345.2	305.5	13	14
Menswear	247.8	227.0	9	10
Non-apparel	289.7	211.2	37	39
Other*	27.9	20.5	36	38
Total retail/wholesale	910.6	764.2	19	20

* Mainly childrenswear

Womenswear (38% of sales)

Womenswear revenue grew by 14% on an underlying basis, driven by Prorsum, seasonless and fashion outerwear.

Menswear (27% of sales)

Menswear revenue grew by 10% underlying, with new modern outerwear styles driving this performance. The revitalisation of menswear continues in Autumn/Winter 2008, with further product innovation in outerwear, Sport and tailoring (in the London Collection part of the pyramid). The non-renewal of certain menswear licences enables a more cohesive tailored collection.

Non-apparel (32% of sales, up from 28% in 2007)

Non-apparel was the fastest growing of Burberry's main product categories in the year, up 39% underlying, as it benefited from product innovation and prominent positioning in global advertising campaigns.

Luxury handbags continued to drive the growth in both retail and wholesale channels. During the year, revenue from shoes more than doubled at wholesale value, albeit from a small base, as Burberry replicated the strategies it has used successfully in outerwear and luxury handbags. Notably, Burberry invested in dedicated design, merchandising and sourcing teams, expanded the Prorsum and London Collection shoe ranges and supported this with more focused marketing. As a result, the average selling price in shoes increased by over 20% for Autumn/Winter 2007.

Other

Revenue here, which is mainly childrenswear, grew by 38% on an underlying basis. Burberry's first ever standalone childrenswear store was opened in Lee Gardens, Hong Kong in March 2008.

Operating profit analysis

Total operating profit

	Year to 31 March		% change
£ million	2008	2007	reported	underlying
Retail/wholesale	135.6	111.7	21	23
Licensing	70.6	73.4	(4)	1
Adjusted operating profit	206.2	185.1	11	14
Adjusted operating margin	20.7%	21.8%

Atlas costs	(19.6)	(21.6)
Plant closure costs	-	(6.5)
Relocation of headquarters	15.1	-
Operating profit	201.7	157.0	28	32

Adjusted operating profit grew by 11% to £206.2m in the year. Exchange rates reduced profit by £5.0m or 3%. The adjusted operating margin fell by 110 basis points, with the increase in retail/wholesale operating margin offset by a lower proportion of profit from higher margin licensing.

Atlas costs, which relate to the Group's infrastructure redesign initiative, were £19.6m. As previously announced, Burberry completed the sale of its central London building (Haymarket) during the year, in advance of the global headquarters relocation planned for late 2008. The net profit relating to this disposal was £15.1m and the cash proceeds were £28m.

Retail/wholesale adjusted operating profit

	Year to 31 March		% change
£ million	2008	2007	reported
Revenue	910.6	764.2	19

Cost of sales	(377.7)	(329.0)	(15)
Gross margin	532.9	435.2	22
Gross margin %	58.5%	56.9%

Adjusted operating expenses	(397.3)	(323.5)	(23)
Adjusted operating profit	135.6	111.7	21

Adjusted operating expenses as % of sales	43.6%	42.3%
Adjusted operating margin	14.9%	14.6%

Gross margin

Gross margin in retail and wholesale combined increased by 160 basis points for the year as a whole (H1: 300 basis points; H2: 40 basis points).

The majority of the improvement came from Atlas-related benefits, predominantly from better sourcing of products. Burberry also benefited from non-apparel growth, which, as a whole, is a higher gross margin category than apparel. For the year, retail and wholesale revenue grew by broadly the same amount so there was no impact from channel mix. As previously noted, retail sales in the second half came in modestly behind plan, with proportionally more inventory sold during the usual sale period. As expected, this negatively impacted gross margin in the second half.

For 2008/09, Burberry expects a further improvement in gross margin from supply chain savings, although not at the rate experienced during 2007/08, offset in part by the continuing impact of reducing excess inventory.

Operating expenses

About two-thirds of Burberry's operating expenses are incurred in the regions, with the balance at corporate headquarters, which includes design, product development, merchandising, marketing, supply chain, warehousing and distribution and IT, as well as central functions such as finance, human resources and legal.

In the year to March 2008, operating expenses incurred by the regions fell as a percentage of sales. This reflected the operating leverage benefits of 19% revenue growth and was achieved despite the costs associated with a record number of store openings.

In the corporate headquarters, as previously discussed, there was significant investment to support the current and forecast levels of growth at Burberry. Warehousing and distribution costs also increased significantly as additional shifts and temporary capacity was added to deal with volume growth and changes in the business model.

Combined, these factors led to operating expenses as a percentage of sales increasing by 130 basis points in 2007/08.

For 2008/09, a further reduction in operating expenses as a percentage of sales is expected from the regions.

However, as already included in guidance, two factors are expected to lead to an increase in operating expenses as a percentage of sales of over 100 basis points in 2008/09. As planned, the move to Horseferry House, the new global headquarters and showrooms, will incur one-off double running costs of about £6m, mainly in the first half of the year. Secondly, the roll out of SAP to Asia and the United States will incur about £4m of costs, which will be charged to operating expenses (in 2007/08 the costs were charged below adjusted operating profit).

In addition to these £10m of costs, there will be continued investment in areas such as design and supply chain to support new product categories, as well as the full year impact of the investments made during 2007/08. Given the current challenging external environment, the group is carefully monitoring all discretionary spend in areas such as headcount, travel and marketing.

Burberry has recently implemented new global carrier arrangements for the transport of goods from suppliers to distribution centres. By reducing the number of carriers from over 30 to three, there will be savings of about £2m in the first year by leveraging scale. The initiative will also significantly improve visibility and service levels.

Licensing adjusted operating profit

	Year to 31 March		Year to 31 March 2008
£ million	2008	2007	At constant FX
Revenue	84.8	86.1	88.3

Cost of sales	-	-	-
Gross margin	84.8	86.1	88.3
Gross margin %	100%	100%	100%

Adjusted operating expenses	(14.2)	(12.7)	(14.2)

Adjusted operating profit	70.6	73.4	74.1

Adjusted operating margin	83.3%	85.2%	83.9%

As outlined earlier, on an underlying basis, licensing revenue was up by 3% (down 2% reported). As the table above shows, exchange rates reduced both revenue and gross margin by £3.5m, leading to compression of the operating margin. The exchange rate impact reflects a weak Yen (£5.4m negative impact), partly offset by a stronger Euro in the second half. In the year to March 2009, the impact of the Yen exchange rate on reported revenue and profit is expected to be minimal (about £2m favourable).

Taxation

The taxation rate on reported profit before tax for the year was 30.9%. This compares to 29.5% for 2006/07 when there was a 1.5% one-time benefit relating to the settlement of certain transfer pricing arrangements.

The taxation rate on adjusted profit before tax was 30.1%, after an adjustment relating to the net profit on the disposal of its central London building (Haymarket).

For 2008/09, Burberry expects a similar taxation rate on reported profit before tax of about 31%.

Cash flow and net debt

Net debt at 31 March 2008 was £64.2m, compared to £89.2m at 30 September 2007 and £2.8m at 31 March 2007. The major cash flow movement was a £123m outflow for inventory, as a result of three main factors. The largest of these was a one-off step change in stock required to support the new business model, particularly holding inventory for replenishment and the new market calendar with an April floorset. The second largest factor was inventory to support growth in the business, with the balance being an outflow due to retail sales modestly behind plan in the second half of the year.

Other major cash flows were capital expenditure (2008: £49m up from £34m in 2007), taxation paid (£53m), a £28m inflow from the disposal of the central London building (Haymarket), dividend payments of £47m (2007: £37m) and a £40m outflow on the share buyback programme, where 6.2m shares were purchased.

Store portfolio

	Directly-operated stores
	Mainline stores	Concessions	Outlets	Total	Franchise stores#
At 31 March 2007	77	182	33	292	58
Additions	21	60	10	91	21
Closures	(1)	(11)	(3)	(15)	-
At 31 March 2008	97	231	40	368	79

Store portfolio by region

	Directly-operated stores
At 31 March 2008	Mainline stores	Concessions	Outlets	Total	Franchise stores#
Europe*	28	17	15	60	8
Spain	6	126	4	136	-
Americas	47	-	19	66	-
Asia Pacific	16	88	2	106	52
Rest of World	-	-	-	-	19
Total	97	231	40	368	79