FTSE 100 falls as struggling British luxury brands

LONDON — British luxury fashion houses Burberry Group Dropped out of the UK FTSE 100 The stock index fell sharply on Wednesday as declining sales and a string of management changes added to the mounting pressure facing the 168-year-old retailer.

The company retreated to the FTSE 250 index during the quarterly rebalancing in September, ending a 15-year streak of inclusion in the UK’s large-cap FTSE 100 blue-chip index, index provider FTSE Russell said in a statement.

The changes will be implemented at the close of trading on September 20th and will come into effect on September 23rd.

The demotion is another blow for Burberry, whose shares have plummeted in recent months as the brand has fallen out of favor with consumers amid a broader luxury market downturn.

The company’s shares have fallen more than 53% so far this year and about 70% in the past 12 months.

The company’s current market capitalization of £2.34 billion ($3.06 billion) is well below the rest of the FTSE 100 and some of the top names in the FTSE 250. That could prompt funds investing in the FTSE 100 to sell their Burberry holdings.

Burberry’s troubles began long before its recent share price decline.

Founded in Basingstoke, England in 1856 and listed on the London Stock Exchange in 2002, Burberry has gained international recognition for its iconic collection of trench coats, handbags and its namesake checked pattern.

The luxury brand’s addition to the FTSE 100 in September 2009 was seen as further testament to its enduring appeal and resilience even during the global financial crisis.

But as Burberry’s iconic patterns were gradually adopted by Britain’s working class in the 1990s and 2000s, the brand’s luxury aesthetic took a major hit and has struggled to recover.

Successive CEOs have tried to reinvigorate the company’s image and elevate it to a luxury brand, but the market has not been convinced, and investors are also worried about the company’s high turnover at the top level, with four CEOs in the past decade.

The appointment of Joshua Schulman as CEO in July signaled a change in direction.

Luca Solca, managing director and global head of luxury at Bernstein, said the former CEO of Coach and Michael Kors could revive the company’s fortunes by shifting focus from elevating the brand to a “British Coach” strategy, which would include cutting costs, doubling down on outlets and increasing exposure to discount retailers.

“We have been advocating for a ‘Coach UK’ strategy and the appointment of MK and former Coach CEO Josh Shulman appears to be a step in this direction,” Solca told CNBC in an email.

Bernstein estimates that this new approach could go a long way to helping the company’s struggling financial situation. In July, Burberry reported a 21% drop in first-quarter same-store sales, issued its third profit warning in 12 months, and suspended dividend payments.

Analysts have warned that unless a major reset occurs, the stock is likely to fall further. “Current trading trends suggest weakening momentum for the Burberry brand, and we believe Burberry will need to address the situation soon to prevent further market share loss,” RBC analysts Pilar Dadania and Richard Chamberlain wrote in a July note.

That could make the company a takeover target, Solca said. But if the management change proves successful and the stock price recovers, “that makes it less likely,” he said.

Further changes at the top are expected before Schulman provides a strategic update in November, with the fashion house currently in talks with headhunters to replace chairman Gerry Murphy, according to Sky News.

Burberry did not immediately respond to CNBC’s request for comment on the report.

Cole Smead, CEO of Smead Capital Management, suggested that Mr. Shulman taking over as chairman could allow him to move the strategy forward more quickly and restore investor confidence, a practice rare among British companies but relatively common in the United States.

“The board is wasting time searching around for a suitable chairman when there is a real need to focus on Mr. Schulman for shareholders,” Mr. Smead, the Burberry investor, said in an email. In a separate memo, he suggested the entire board should be revamped to reassure investors.

Burberry is not alone in its decline. The entire luxury sector is suffering from a long-term slump in consumer spending amid inflationary pressures and broader economic uncertainty. Luxury spending in China has been particularly hard hit.

In July, Hugo Boss The company lowered its full-year outlook after reporting sales declines, particularly in Britain and China, but Gucci’s parent company Kering The company issued a weak outlook as a “significant slowdown in China” weighed on first-half revenue. LVMH Revenues also declined in the second quarter due to weak sales in Asia excluding Japan.

Some companies, especially those in the ultra-luxury market, have managed to weather the crisis: Cartier’s parent company Richemont posted record annual sales in May, and Hermes sales rose 13% in the second quarter.

Smead said the slowdown illustrates the cyclical nature of the luxury industry – a factor that’s often overlooked – but also points to an ongoing opportunity for Burberry to recover.

“The old adage is, if you’re going to fall behind, you fall behind fast. Burberry fell behind early, but I believe they will address the real issues sooner than other luxury brands,” he said.

Smead expects the company to eventually return to the FTSE 100, but added that the new management is unlikely to reinstate a large dividend given the “lack of foresight” around previous payouts.

Burberry’s half-year results are due to be released on November 14th.