What's going on?

Burberry�s new CEO laid out plans on Thursday to bring the luxury brand even more upscale � but investors totally balked at the ideas and sent the stock on its worst tumble in five years!

What does this mean?

Burberry is a luxury brand, but it�s not quite as luxury as other players. Burberry�s new CEO wants to place it firmly among the pantheon of high-end luxury retailers. The plans will see it close underperforming stores and pull back its products from department stores, especially in the US (department stores tend to discount luxury products, thus �cheapening� the brand). Burberry will also create new, more exclusive designs and, crucially, raise its prices to top-tier luxury brand levels.

Why should I care?

For the market: Burberry will be nursing some bruised profits for the next few years.


The problem for investors is that the proposed initiatives are expensive: they will likely lead to falling profit growth for at least the next two years. Burberry is also yet to hire a new chief designer, obviously pretty crucial for a fashion company. The saving grace for the stock, in the near term at least, is that it is constantly mentioned as a possible takeover target for a bigger competitor (like Coach, for example). So, despite Thursday�s 10% drop, Burberry�s stock is still in vogue � it�s up more than 20% over the past year.



The bigger picture: The luxury industry is doing well � largely thanks to China.


Burberry�s sales growth in the US in its most recent quarter remained lackluster, but its global sales still grew 4% over the past year. The increase was largely down to improving sales in China, where the economy is back to solid growth following some tepid times in 2015 and early 2016. The Chinese �corruption� crackdown, which hurt sales of luxury goods, also seems to have eased. Burberry clearly thinks it needs to do more � hence the new strategies � but at least the global luxury environment is a fairly friendly place right now.