Burberry, BRBY, Update On Weds – How Bad Will China Hit Be?

Burberry (LON: BRBY) shares are weak this morning as the market awaits the next trading update. That arrives on Wednesday and the big question is just how bad is the hit from China going to be?

The problem is threefold which is rather a lot for one company to have in just the one country. The first is just that simple issue that affects everyone in the supply chain these days. China’s lockdowns have been out of sync with those of everyone else which has meant that their inability to produce hasn’t coincided with everyone else’s desire not to consume. So, those producing in China have had problems in gaining the stock to sell elsewhere.

The second and third issues are relevant to those who market in China – as Burberry does. Asia-Pacific is half of sales, a third are in China itself (and a goodly portion of the rest from travelling Chinese). So, what happens to the Chinese consumer market for luxury goods matters for Burberry shares. This is perhaps why those Burberry shares are down 22% over the past 6 months. China is again out of step with the rest of the world concerning lockdowns.

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The second issue is simply those lockdowns. As we look around Europe we can see that they’re over. As far as covid itself is concerned we’re now back to normal – sure we’ve inflation and rising interest rates as a result but in terms of disease we’re done. This isn’t true in China at all. The combination of the Sinopharm vaccine not being very good plus a zero covid policy means that lockdowns are not just continuing but where they’re implemented they’re complete. This obviously has an effect upon retail sales and perhaps even more so for luxury goods.

The third is the overall health of the Chinese economy. We’ve seen that property sector start to go into a tailspin and given the size of it with reference to GDP (well over 20%, at least twice the size of other economies) that could be the harbinger of the first proper recession in China for decades. That also wouldn’t do well for sales of luxury goods like Burberry.

Now, all o9f these factors are entirely outside Burberry's control but they all have an effect on the company’s prospects. There is the one more issue that is within their control which is the brand itself and its reputation. There’s been much concern that Burberry, the plaid itself, has become more than a little “chavvy”. Moving it back upmarket it what is required in order to be able to continue charging premium prices.

The trading update on Wednesday will be examined for what it tells us about brand positioning and so on. But the really important part is going to be what management says about conditions in China. Yes, we can see news reports and so on but what matters is real, hard and cash, numbers. This is what we’re going to get and trading positions ahead of the results should be set dependent upon what we think those results are going to be.