Burberry shares will get no raincheck from China

Burberry is still getting rained on hard in East Asia.

The trench coat-to-cosmetics and luxury fashionable goods retailer said sales in its Asia Pacific region in the three months to 30th June slipped by a low single-digit percentage point.

Hong Kong— representing about 10% of Burberry’s total retail/wholesale sales—was once again the epicentre of its troubles in the region.

Although still characterised as a ‘high-margin’ retail environment, a hangover from Hong Kong political disruption last year, combined with an economic slowdown in mainland China—most visible in the a recent stock market rout—ate into Burberry’s Apac revenues.

Location-specific ‘comparable’ retail sales in Hong Kong tumbled by “a double-digit percentage”, the luxury firm said—again taking advantage of the easier disclosure rules afforded by interim releases, but inadvertently extending concerns about the speed at which sales are deteriorating, due to what it called the “continued challenging environment”.

Burberry has quietly shelved the more customary ‘like-for-like’ retailing sales reporting methodology—comparing revenues from stores open more than a year—in its first-quarter release.

Comparable slowdown

Hong Kong weighed on Asia, and Asia, Burberry’s biggest revenue generator in the last financial year, in turn weighed on group retail sales.

These rose 8% on an underlying basis, but that was well beneath the 13% rise analysts were expecting, and also weaker than the 9% advance achieved in Burberry’s second half, 2014.

It took in £407m in revenues for Q1 2015.

Without adjusting for currency fluctuations, the gross retail rise would have been 10%.

‘Comparable’—if not ‘like-for-like’—sales were 6% higher.

Given double-digit percentage comparable sales growth in EMEIA, “with strength from the travelling luxury customer in France, Italy and Spain” and a respectable single-digit rise in Americas footfall, the severity of Asia’s retreat was more apparent.

Yet the UK’s biggest and best-known upper-bracket luxury goods manufacturer said essentially nothing about potential remedial action it would take.

FX might give back £10m

“While mindful that the external environment remains challenging, we will continue to focus on growth opportunities across channels, regions and products, with exciting plans for the year ahead”, said CEO (and Chief Creative Officer) Christopher Bailey.

No further hope was offered for the year ahead save for a £10m potential improvement of revenue guidance given in May (when guidance was cut) predicated on exchange rates behaving themselves.

Whilst, this doesn’t mean management won’t be earning its keep to get the best possible outcome under the circumstances in China and Hong Kong, we note the structural ‘underweight’ or ‘equalweight’ in the majority of major Western brokerages on a six-month horizon for ‘household name’ equity plays on the region.

Also that global BRBY EPS consensus is pointing 2% lower, compared to -0.2% forecast for Asia Pacific Textiles & Apparel, digging into data collated by Thomson Reuters.

Investors holding on

All this makes the 2% fall in Burberry’s stock on Wednesday look quite contained.

That at least partly reflects continuing faith among investors, including the institutions that became keen on this name during its years of better revenue growth— 13.42% compounded over six years.

The continuation of anything like that rate is in question at this point.

At the same time, the stock chart suggests balanced sentiment on the stock.

But the shares really need to make clearer progress from their current level.

That’s because traders very likely have an eye on BRBY’s proximity to an important retracement mark drawn off the stock’s uptrend between October 2012 and February 2015.

The stock is about 19% off all-time highs reached at the end of that stretch.

It will have lost half of those gains—an important inflection point for investors—if it falls just 15% more.

All other major factors in the chart look weak to me.

The stock finally lost its last moving average advantage (the 200-day) in June.

And the lines of the Slow Stochastic Oscillator yesterday flashed their classic ‘sell’ signal by crossing and inverting lower, whilst above the ‘overbought’ boundary.

Please click image to enlarge