Imminent departure of Burberry CEO puts makeover at risk

The Burberry check is back in fashion. But it is an imminent checkout that is weighing on the British luxury group.

Burberry Group reported a rebound in sales on Friday. But with CEO Marco Gobbetti poised to leave at year’s end to join smaller Italian rival Salvatore Ferragamo, the company’s nascent turnaround risks coming apart at the seams.

A big part of Gobbetti’s goal at Burberry was elevating the company from something that was simply premium to the top echelons of luxury.

He has stabilised it since joining in July 2017. That is evident from same-store sales, which have risen 90% from the year earlier in the three months to June 26, ahead of analysts’ expectations. They were just above prepandemic levels, too.

He brought in a new designer, Riccardo Tisci, and laid the foundations for a superluxe Burberry, building a handbag business, modernising its trademark coats and expanding footwear, including sneakers.

He also stopped selling products in downmarket stores and cut back on special offers. Burberry is now more in vogue with millennial and Generation Z shoppers, thanks partly to streetwear-style “drops” of limited edition products. It is not uncommon to see young people on the streets of London wearing the trademark tan, black, red and white check alongside Gucci and Balenciaga.

But the British company still lacks the sort of buzz — not to mention the sales growth and margin expansion — that Gucci was commanding just a few years after parent Kering embarked on its transformation in 2015. Indeed, Burberry’s reinvention is far from finished. For example, there is still more work to do to bring handbags to full potential. Elsewhere in the luxury industry, they are the engine of sales and profit.

CEO’s chemistry

Progress was derailed by the pandemic. And, emerging from the crisis, the company must embark on a search for a new CEO. Given the trajectory of the turnaround, the strategy of the new CEO must remain broadly in line with Gobbetti’s. That may deter some candidates who want to put their own stamp on Burberry.

Even more crucial will be the new CEO’s chemistry with Tisci, who had worked with Gobbetti at LVMH’s Givenchy. The designer was brought on board at Burberry in March 2018.

Boding well for continuity is Tisci’s history of staying in place. He spent more than a decade at Givenchy after Gobbetti moved to LVMH Moet Hennessy Louis Vuitton’s Celine. Tisci’s relationship with the new CEO will be crucial in determining whether he has a similarly long tenure at Burberry.

I was sceptical about Gobbetti’s appointment of Tisci — whose style is between the classic aesthetic of former Celine designer Phoebe Philo and the fashion revolution of Gucci’s Alessandro Michele — but a change of creative direction now would be unhelpful. For example, the company has put significant efforts behind a new logo and Tisci’s interlocking T and B monogram design, now emblazoned on everything from sweatshirts to sun visors.

Private equity

At Ferragamo, Gobbetti will not have as much heavy lifting as at Burberry. The former LVMH executive will be focused on rejuvenating a heritage name that has lost its way, but which is already at the high end. It will not be an easy task and will require fresh creative direction and millennial-friendly marketing. But Ferragamo is also less than half the size of the British company, and it is under the stewardship of a single controlling shareholder. Gobbetti does not have to answer to a diverse investor base.

There is much riding on Burberry getting the new CEO appointment — and the rest of its revival — right. It is vulnerable to the current financial fashion: private equity eyeing undervalued UK businesses. Burberry’s forward price to earnings ratio is at a discount to bigger rivals. Excluding store leases, it also had almost £1bn of net cash on its balance sheet.

The luxury conglomerates LVMH, Kering and Cie Financiere Richemont, which has more than doubled fiscal first-quarter sales, have enjoyed more robust postpandemic recoveries, and have muscular balance sheets.

Kering has said its priority is organic growth, but it will not rule out deals. The company’s track record of turbocharging tired brands — not just Gucci, but also more recently Bottega Veneta — makes it ideally positioned to take on Burberry.

If Burberry does not manage Gobbetti’s checkout smoothly, someone else might be tempted to finish what he started.

Bloomberg Opinion. More stories like this are available on bloomberg.com/opinion