Burberry has bought 50 of its Chinese franchised stores in a deal worth 70 million pounds. Control of its franchising may add as much as 20 million pounds to operating profit in the year through March 2012, the Pimlico-based company said.
“Financially, the deal is excellent,” Dennis Weber, an analyst at Evolution Securities in London, said in a note. Earnings per share may be enhanced by about 6 percent in fiscal 2012, said Weber, who has a “neutral” rating on the stock.
Luxury companies are seeking to tap growth potential in China, where the number of millionaires soared 31 percent last year, according to research by Capgemini SA and Merrill Lynch & Co. The country’s luxury goods market will be worth $14.6 billion in five years, making it the world’s largest, the Chinese Academy of Social Sciences said in May.
Burberry rose 9 pence, or 1.1 percent, to close at 799.5 pence as of 4:30 p.m. in London trading. The shares have gained about 33 percent this year, giving the company a market value of about 3.5 billion pounds.
“This is a very attractive deal from a strategic and financial perspective, giving us control in a key growth luxury market,” Chief Executive Officer Angela Ahrendts said on a conference call. “We can see clear opportunities to further increase sales and profits.”
Retail sales in the Chinese stores, which were previously reported as wholesale revenue, totaled 75 million pounds in the year through December 2009, generating profit of about 14 million pounds for the local franchisees, Burberry said. Had Burberry owned the stores in the financial year ended March 2010, retail revenue would have represented 63 percent of total sales, up from 58 percent without them, Ahrendts said.
Under the new agreement, Burberry will take over the outlets’ operational management, while existing franchisees will hold a 15 percent stake in their business, the company said. Burberry, which currently has 13 directly operated stores in Hong Kong, one in Macau and 19 in Taiwan, plans to open 10 more units in China this year, Ahrendts said.
Image: Burberry Fall 10 campaign
Click here for an explanation of CEO Angela Ahrendt.