Burberry and Richemont sales hit after China’s Covid surge hammers demand

Luxury groups Burberry and Richemont reported weaker than expected quarterly sales over the crucial Christmas shopping season following Covid disruption in China that slashed customer demand.

Sales at both the British and Swiss luxury groups fell by a quarter in the last three months of 2022 after China abruptly ended its contentious “zero-Covid” policy, which led to soaring infection rates.

Strong demand from Japan and the return of tourists to Europe was not enough to offset the hit from mainland China, although analysts are anticipating a “big bang” later this year when normal trading conditions resume in the country and Chinese tourists once again travel abroad.

China is the world’s second biggest market for luxury goods after the US, so investors have sent the sector’s biggest names higher since December in anticipation of the coming sales boost.

“In December we did see additional pressure on traffic due to a surge in infections [in China]”, Burberry’s chief financial officer Julie Brown said on Wednesday. “However, in January as we reopened we’ve seen very promising signs.”

Burberry recorded revenues of £756mn, a rise of 1 per cent on the equivalent period in 2021, which was lower than analysts’ forecasts. Before the pandemic two-fifths of the group’s sales were to Chinese consumers, which is now down to 25 per cent.

Outside mainland China, Burberry registered sales growth of 11 per cent, led by the return of high-spending tourists to Europe. The company said its accessories sales grew in the double-digits over Christmas, with its iconic beige checked scarf responsible for 60 per cent of soft accessory sales.

The group maintained its short- and medium-term guidance for high single-digit revenue growth, adding that currency movements would give it a £160mn benefit.

At Richemont, which owns Cartier and watchmaker Jaeger-LeCoultre, revenue rose 5 per cent once currency effects were stripped out and 8 per cent on a reported basis to reach €5.4bn, which was lower than the €5.7bn forecast by analysts. High-end watch sales also dropped but Richemont said that sales had improved in January.

Analysts at Citi called Richemont’s trading update “a mixed bag”, noting underperformance in jewellery and watch sales, as well as the positive impact of American tourists abroad.

Shares in Richemont have risen about 11 per cent since early December, while sector leader LVMH is up 10 per cent and Hermes 6 per cent. Burberry’s share price was up 2 per cent in midday trading on Wednesday, while Richemont’s rose just over 1 per cent.

“This is clearly a transition quarter, with a massive impact from zero-Covid,” Bernstein analyst Luca Solca wrote in a note. “The key drivers in fiscal year 2023 remain the magnitude of Chinese spend rebound and the moderation of western luxury spend.”