No-deal Brexit could cost Burberry tens of millions of pounds

UK luxury fashion brand Burberry has stated that a no-deal Brexit could cost it tens of millions of pounds in tariffs and could hurt its ability to source fabrics and export goods to suppliers and stores.

In a trading update on Tuesday, the brand reported a 1 per cent increase in comparable store sales across the 13 weeks to 29 December 2018, with Mainland China growing in the mid-single digits.

Julie Brown, Burberry’s chief operating and financial officer, also revealed the expected impact on the company if the UK exits the EU without a withdrawal agreement.

“The biggest concern is the disruption to the supply chain,” Brown said, according to the Financial Times.

“Burberry imports and exports significant volumes of raw materials, samples and finished goods between the UK and the EU, and it is the logistical delays that would impact design, product development and customer fulfilment.”

To mitigate the effects of these restrictions, Brown said that UK retailers would need to provide European suppliers with higher inventory levels to combat the ease with which European labels could resupply, though this would add “additional inbuilt inefficiencies” into the operating model that would “certainly affect the balance sheet and the cash conversion”.

“We are taking mitigating actions… If we had a no-deal scenario, we would be subject to [World Trade Organisation] rules and absent any mitigating actions our duty costs would increase materially, in the low tens of millions of pounds,” Brown told reports, according to Reuters.

The company’s 1 per cent sales growth fell short of analyst expectations, with the Financial Times reporting that experts expected a 2 per cent increase. Burberry’s stock price fell 2 per cent, following the earnings call, to $31.91 (£17.43).

Burberry has not adjusted its outlook for FY19, saying it expects “broadly stable revenue”, as well as the delivery of $183 million (£100 million) in cumulative cost savings.

Burberry is but the latest in a string of retailers beginning to note the pressure a potential no-deal Brexit will put on business models, with supermarket giant Tesco recently renting additional refrigerators “as part of a contingency plan due to Brexit” to store additional food.

US toy-maker Build-A-Bear lowered its guidance for fiscal 2018, expecting revenue to fall by between 17 and 20 per cent largely isolated in the UK.

IBISWorld senior industry analyst Liam Harrison noted the effects of the no-deal scenario would be felt by retailers dependent on their reliance on the EU for supply chain and customers.

“The British retail industry will struggle to maintain supply chains, at least initially, in the face of a no-deal Brexit. For many retailers, especially those in perishable goods and pharmaceuticals, this may result in shortages short-term as supply chains adjust to their new customs measures,” Harrison told IR.

The UK is scheduled to exit the EU on 29 March 2019.

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