Burberry’s CEO wants to take it further upmarket — now the stock is diving

Models walk the runway at the Burberry show during the London Fashion Week February 2017 collections on February 20, 2017 in London, England.

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Models walk the runway at the Burberry show during the London Fashion Week February 2017 collections on February 20, 2017 in London, England.
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Tim P. Whitby/Getty Images

    Burberry’s new CEO announced plans to establish the brand “firmly in luxury.” Transformation of the brand will cost up to £160 million a year in capital expenditure and both profits and revenue are likely to be flat for the next few years. Stock dived 10% on the news, recovering slightly to an 8.5% fall by mid-morning.

LONDON – Burberry stock crashed almost 10% on Thursday morning after the British luxury brand’s new CEO announced plans to take it further upmarket.

Burberry said in a statement that it would “sharpen our brand positioning. This will require us to change our approach to product, communication and customer experience.”

The business, known for its check trench coats and scarves, plans to “create compelling luxury leather goods and accessories to attract new customers.”

CEO Marco Gobbetti, who joined Burberry from French fashion house Celine last year, said in a statement: “Now is the right time for Burberry to implement the next phase of its transformation. By re-energising our product and customer experience to establish our position firmly in luxury, we will play in the most rewarding, enduring segment of the market.”

Investors have not taken well to the news, and Burberry’s stock is down over 8.3% at 11.30 a.m. GMT (6.30 a.m. ET):

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Markets Insider

UBS analyst Helen Brand said in a note: “This is a more aggressive reset than the market had been expecting with FY19 and FY20 sales and operating margins now expected to remain flat on FY18.

“The timing of a new Creative Director to reinvigorate the product’s fashion content will also be a key question today.”

Longtime Burberry creative director Christopher Bailey, who helped reinvent the brand in the 2000s, announced last month plans to leave the company next year.

Steve Clayton, manager of the Hargreaves Lansdown Select UK Growth Shares fund, which holds a 3.8% position in Burberry, said:”Mr Gobbetti wants to take Burberry out of all but the most exclusive stores, starting in the US wholesale channel, and then more widely. Product is to be reinvigorated, and accessories emphasised.

“It’s a text-book luxury brand repositioning exercise, which should leave Burberry jostling up against the world’s most exclusive names, with the margins to match. But this will take time and in the near term, sales growth will be held back and the group must invest more to achieve its goals. Medium term, the group are expecting an acceleration in sales, margins and operating profits as a result of the shift.”

Ken Odeluga, a market analyst at City Index, said in an email: “Burberry sees £120 million cumulative annualised savings in 202o. But these will be more than offset by a £15 million restructuring charge in 2019 and an £150 million-£160 million annual capital expenditure rate in 2019 and 2020.”

Burberry’s strategy update came as the luxury group announced a 9% rise in half-year revenues to £1.2 billion and a 24% rise in operating profit to £127 million.