Burberry’s domino effect on luxury sector

After issuing a profit warning Tuesday, Burberry’s stock tumbled by 21 percent in London Stock Exchange, provoking the so-called domino effect within the quoted luxury companies. It was the case of PPR, LVMH or Financiere Richemont, all of them seeing their value shattered.

Analysts warned that the news could signal that the high-end luxury goods industry was no longer immune to weakness in the global economy.

“A worrying piece of corporate news this morning has come in the form of Burberry’s profit warning,” said Simon Denham, head of trading firm Capital Spreads.

“We know we are not alone in terms of what we’ve seen in the last couple of weeks,” Chief Financial Officer Stacey Cartwright said today in an interview, citing conversations with other luxury-goods makers, published ‘Bloomberg’. Backing this statement, Burberry Group Plc Chief Executive Officer Angela Ahrendts said, “The external environment is becoming more challenging.”

Soon after Burberry’s profit warning going public, Mulberry fell sharply in sympathy in London, ending at 12.90 pounds (a 5% decline), while LVMH and PPR stocks slid by 3.36 per cent and 2.07 per cent respectively. Richemont also closed lower. In Italy, Prada posted its biggest fall in two months (-6.4 percent) on the news to close at 60 Hong Kong dollars, down 6.25 percent and after gains of 73 percent so far this year.

Burberry said in a trading update that like-for-like sales, stripping out the impact of new floor space, ground to a halt in the 10 weeks to September 8 and have started to fall. Consequently, Burberry warned that annual profits would be at the bottom end of analysts’ expectations of between 405 million euros (502.86 million dollars) and 445 million euros. In reaction, the group’s share price plunged by 22.11 per cent to 1088 pence.

However, most brokers immediately reiterated their positive longer-term stances on the stock yet downgraded their ratings on the stock, citing limited near-term visibility. Nomura, Seymour Pierce and Investec all cut their ‘buy’ recommendations for the shares today to adopt a more cautious view, published ‘Sharecast.com’.

In a note to investors, Analyst Kate Calvert at Seymour Pierce cut her recommendation, warning that “This news will obviously hit sentiment towards Burberry and the luxury sector and the shares are likely to underperform until there is better news on demand so we are cutting our recommendation to hold [from buy].”

In the same vein, Bethany Hocking at Investec said that they “understand market forecasts are for £407m-£455m. We had expected £440.6m, so for us this represents a downgrade of around 8%.”