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Burberry could become the exception and benefit from Brexit

By Angela Gonzalez-Rodriguez

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Management |ANALYSIS

Fashion giant Burberry became the latest firm to warn employees of the risks of Brexit, in a letter sent to staff yesterday. Thus, according to RBC Europe Limited, although Brexit is “a negative for the sector overall, it is merely “mixed” for Burberry Group.

“The real beneficiary of a weakening GBP should be Burberry,” says analyst Rogerio Fujimori at RBC Europe Limited in the note.

“Currency fluctuations tend to shift travel flows and luxury purchases around the globe: A weakening GBP may shift overseas tourist flows to the UK, which would benefit Burberry Group.” You may have seen this thesis already in other contexts—that while the plummeting pound is bad for Brits, it’s nice for foreigners who’d like to visit England. It means your trip to London will be a lot cheaper. So Burberry’s eventual higher costs may be offset by American tourists buying up Burberry threads in England.

40 percent of Burberry's operational costs is in pounds

Burberry’s exposure to the pound is an important part of this. It sees about 14 percent of its revenue in pounds, 15 percent of its cost of goods sold (COGS, in retail parlance), and 40 percent of its operational expenses. Besides, circa 65 percent of Burberry’s cost of goods sold is in euros, highlights Sanford C. Bernstein.

On the other hand, it’s noteworthy that the quintessentially British label makes the majority of its leather-goods items and almost all its clothing in Italy, said BNP Paribas analyst Luca Solca in a note to clients earlier this week.

“We face a period of ambiguity that could see companies and customers alike delaying significant decisions relating to investment, employment and travel. As a responsible business, we are of course scenario planning to prepare and protect ourselves in the event of a leave vote,” Chief executive Christopher Bailey and chairman sir John Peace told in a note to staff prior to the referendum.

Both warned that a Leave vote would trigger “unnecessary economic consequences” and stressed that the business would be “stronger and more prosperous” inside the EU, reports the ‘Financial Times’.

Most analysts are saying that the UK’s vote to leave the European Union will damage almost every retail sector in Europe across the board. It makes simple sense: A weaker British Pound means that British companies will spend more on production costs in other countries, and will have to pass on those expenses to the shoppers by raising prices; if it’s harder for other EU citizens to visit England, it may also cut down on shopping by European tourists. There’s good reason 90 percent of the members of the British Fashion Council wanted to stay in the union, and why British fashion designers are vocally unhappy about the vote.

Image:Burberry Web

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