: Burberry ‘encouraged’ by recovery but warns new European lockdowns could hit revenues in second half

But analysts cautioned that Burberry BRBY, +0.76%, best known for its signature checked trench coats and scarves, still faces challenges as several European countries have reintroduced lockdowns in recent weeks.

Read: Here’s How French and German Covid-19 Lockdowns Could Rattle Luxury-Goods Sales

Burberry said profit before tax fell 62% to £73 million in the six months to Sept. 26.

Revenues came in better than expected, with a decline of 31% to £878 million, beating estimates of £849 million, with the reported operating profit of £88 million compared with an expected loss of £3 million. 

“While the virus continues to impact sales in EMEIA [Europe, Middle East, India and Africa], Japan and South Asia Pacific, we are encouraged by our overall recovery and the strong response to our brand and product, particularly among new and younger customers,” said Burberry Chief Executive Marco Gobbetti, in a statement.

Shares in Burberry have fallen 24.6% so far this year, underperforming the wider FTSE 100, which is down more than 15%. The stock rose 3.75% in early morning London trading. 

The luxury-goods sector was one of the first to be severely affected by the coronavirus outbreak, due to its heavy exposure to China, where the virus originated. Global travel restrictions also stopped tourists, including Chinese consumers, from visiting fashion hot spots such as London and Paris. As COVID-19 spread across the world, the sector’s problems deepened. 

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However, China’s reopening earlier this year, followed by the easing restrictions elsewhere, has helped the industry launch a recovery in recent months.

Burberry, whose latest campaign features soccer star Marcus Rashford, said a recovery was under way with “sequential improvement in comparable-store sales,” which fell 6% in the second quarter compared with a 45% drop in the first quarter.

The company said it continues to be strong in Asian markets, with mainland China delivering “good double-digit sales growth” across full price channels since May.

The Americas also saw a strong performance, with store sales up 21% in the second quarter.

Read: Burberry Shares Are Tumbling Because Covid-19 Hit Sales Hard and Layoffs Are Coming

Following new lockdown restrictions across Europe, however, Burberry said more than 10% of its global stores were now closed again. Lockdown in England is set to last until Dec. 2.

With the company attracting new and younger customers, it said it had decided to limit the amount of the reduced-price stock. While it expected the move to hit revenue in the second half, it said it would “serve the long term interest of the brand.”

In July 2018, Burberry drew criticism for its decision to destroy unsold clothes, accessories and perfume worth millions of pounds to prevent them being stolen or sold cheaply. The company later said that it would stop burning its unsold inventory.

“This [decision to reduce the amount of markdown stock] could hurt revenue in the second half, but is actually a savvy move in terms of brand preservation and elevation, which are key parts of Burberry’s current strategy,” said Sophie Lund-Yates, equity analyst at Hargreaves Lansdown.

“There are still significant challenges though. Lockdown 2.0 has resulted in another round of store closures, and subdued tourism is acting as a drag too. Burberry relies quite heavily on tourists, and overall, revenue is still dragging its knuckles on the ground, “ Lund-Yates said.

“That’s despite impressive growth in the online business, and better trading in mainland China, Korea and the U.S. Better isn’t good enough though, with the huge declines seen in the first quarter not being erased just yet,” she added.