Burberry, the British luxury goods company and one of the country’s highest-profile exporters, has said a no-deal Brexit could lead to tens of millions of pounds a year in extra costs for its business.
The fashion house, which is preparing to roll out new creative director Riccardo Tisci’s debut collection in stores, missed analysts’ expectations for third-quarter sales growth. It reported an anaemic 1 per cent for the 13 weeks to December 29, compared with the same period the previous year.
Shares in Burberry fell 2 per cent to £17.43 on Wednesday morning, as chief operating and financial officer Julie Brown detailed the impact on the company of the UK leaving the EU without a withdrawal agreement.
Ms Brown said the tariff costs of Britain trading under World Trade Organization rules in the event of a no-deal Brexit would hit the company’s earnings before interest and tax by “the low tens of millions” of pounds a year.
She added that there would also be disruption to Burberry’s design process and to its manufacturing in the UK, which is concentrated in Yorkshire.
“The biggest concern is the disruption to the supply chain,” said Ms Brown. “Burberry imports and exports significant volumes of raw materials, samples and finished goods between the UK and the EU, and it is the logistical delays that would impact design, product development and customer fulfilment.”
She added that “at the moment” Burberry could send orders to stores in Europe “within a day or two”, a situation that would change “if there are border checks”.
To mitigate a situation where European luxury goods rivals could get their collections to EU customers quicker than Burberry, Ms Brown said “we would have to run with higher inventory levels”. The effect of this would “be additional inbuilt inefficiencies” that would “certainly affect the balance sheet and the cash conversion”.
Burberry is far from the only British business to warn of the cost of a no-deal Brexit. With the Channel tunnel already congested and a government-commissioned study finding that just 80-second customs checks would cause permanent gridlock at Dover, the CBI business group has warned that a no-deal Brexit could have a huge impact on the UK economy.
Burberry did not alter its full-year earnings forecasts in Wednesday’s trading update.
The group’s 1 per cent sales rise came as the continued enthusiasm of Chinese shoppers for its product was weighed down by slower trade in the US. Analysts had expected a 2 per cent increase.
Burberry is in turnround mode following several years of lacklustre sales growth that led to the departure of longstanding creative director Christopher Bailey in 2017.
In November, chief executive Marco Gobbetti set out to take the brand more upmarket, expanding in areas such as leather goods and streetwear, and shutting stores.
Mr Tisci’s debut collection generated favourable reviews at London Fashion Week in September and will be widely available next month. According to Mr Gobbetti, the positive publicity around the launch has already “built brand heat and continued to shift consumer perceptions”.
This month, stockbroker Berenberg downgraded Burberry shares from buy to hold, citing a market valuation that looked high given global economic uncertainties and the US-China trade war.
Economic growth in China, whose wealthy consumers provide a large proportion of Burberry’s sales, was at its slowest since 1990 last year. But Ms Brown said that globally, sales to Chinese shoppers showed a “marginal improvement”, thanks in part to their visits to London to take advantage of the weaker pound.
Rogerio Fujimori, a luxury goods analyst at Royal Bank of Canada, said it was “too early to tell” whether Burberry’s recovery had been achieved.
“The product in stores is still the previous collection and the new product is not yet in stores, so it’s a bit of a wait and see,” he said. “Yes, there was a lot of buzz around this high-profile new creative director, but other brands are also generating heat. Basically, for all of them, it’s a market share game in a sector that is growing more slowly than in previous years.”