FTSE 100 drops a struggling British luxury brand

LONDON — British luxury fashion house Burberry Group He dropped out of university in the UK FTSE 100 Index stock index on Wednesday as declining sales and a series of management changes have added to mounting pressures facing the 168-year-old retailer.

The company fell off the FTSE 250 during the September quarterly rebalancing, index provider FTSE Russell said in a statementending its 15-year run on the UK's FTSE 100 large-cap blue chip index.

The changes will be implemented at the close of business on September 20 and will take effect on September 23.

The decline is a further blow to Burberry, whose share price has suffered a sharp fall in recent months as the brand has fallen out of favour with consumers amid a broader slowdown in the luxury market.

Shares are down more than 53% so far this year and about 70% over the past 12 months.

The company's current market capitalisation of £2.34bn ($3.06bn) now puts it well below the others. FTSE 100 Componentsas well as some of the the best performing companies in the FTSE 250. As such, funds investing in the FTSE 100 will exit their Burberry holdings.

Burberry's troubles go back long before its recent share price falls.

Founded in Basingstoke, England, in 1856 and listed on the London Stock Exchange in 2002, Burberry achieved international recognition with its iconic collection of trench coats, handbags and its eponymous check print.

The luxury brand's addition to the FTSE 100 in September 2009 was seen as further evidence of its enduring appeal and resilience, even amid the global financial crisis.

However, the gradual adoption of Burberry's iconic pattern by the British working class during the 1990s and 2000s dealt a severe blow to the brand's high-end aesthetic – one from which it has struggled to recover.

Successive CEOs have tried to revitalise the company's image and elevate it to the status of a luxury brand, but the market has not been convinced. High staff turnover at the top levels (four CEOs have taken over in the past decade) has also made investors nervous.

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

Luca Solca, managing director and head of global luxury goods at Bernstein, said the former Coach and Michael Kors chief executive could try to revive the company's fortunes by shifting the brand's focus to a “British Coach” strategy. That would include cutting costs, doubling down on outlets and increasing exposure to off-price retailers.

“We have been advocating a 'British Coach' strategy. The appointment of Josh Schulman, former CEO of MK and Coach, seems to be going in that direction,” he told CNBC via email.

According to Berstein's estimates, the new approach could provide a much-needed boost to the company's ailing finances. Burberry reported a Same-store sales fell 21% in the first quarter in July, prompting it to issue its third profit warning in 12 months and suspend its dividend payments

Analysts are now warning that further falls in the share price could be expected if a significant rebalancing does not occur. “Current trading trends point to weak Burberry brand momentum which, in our view, needs to be addressed soon enough for Burberry to be able to contain any further market share losses,” RBC analysts Piral Dadhania and Richard Chamberlain wrote in a July note.

According to Solca, this could make the company a takeover target. However, if management changes and the stock price recovers, he said, “the likelihood of an acquisition decreases.”

Schulman is due to present an update on his strategy in November, and more changes at the top could be expected before then. The fashion brand is reportedly working with headhunters to replace its chairman, Gerry Murphy. According to Sky News.

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

Cole Smead, chief executive of Smead Capital Management, suggested Schulman could also take over as chairman, allowing him to move his strategy forward quickly and restore investor confidence. This practice is rare in UK companies but relatively normal in the US.

“It is a waste of the board's time to go looking for the right chairman when there are real needs to focus on with Mr. Schulman in his effort for shareholders,” Smead, who is an investor in Burberry, said by email. In a separate note, he suggested restructuring the entire board to reassure investors.

Burberry is not the only sector to have seen its fortunes crumble. The luxury sector as a whole has suffered a prolonged slump in consumer spending amid inflationary pressures and broader economic uncertainty. Chinese luxury consumption has been particularly hard hit.

In July, Hugo Boss cut its full-year forecast after reporting a drop in sales, especially in the UK and China, while the owner of Gucci Dry issued a weak forecast as a “marked slowdown in China” weighed on first-half revenue. LVMH Revenue also fell in the second quarter due to lower sales in Asia excluding Japan.

Certain players, mainly those in the ultra-luxury space, have managed to weather the storm. Cartier owner Richemont reported record full-year sales in May, while Hermes sales rose 13% in the same period. second quarter.

Smead said the downturn demonstrated the cyclical nature of the luxury sector, a factor that is often overlooked, but also showed the current opportunities for Burberry to recover.

“The old saying goes that if you want to be left behind, do it early. Burberry was left behind early and we believe it will solve its real problems before the rest of the luxury companies,” he said.

Smead added that he expected the company to eventually return to the FTSE 100, but that new leadership was unlikely to reinstate its large dividend given the “lack of foresight” over previous payouts.

Burberry's half-year financial results will be published on 14 November.