Trump’s big win as Burberry sees more weakness in China

President Trump’s clean sweep at last week’s election has been confirmed with the Republicans winning the House. This was expected; however, it gave the dollar a boost overnight, and GBP/USD sunk below $1.27. If we don’t see a stabilization in the pound, then it opens the door to a further decline to $1.25.  There were some concerns that winning the trifecta of elections could give President elect Trump concentrated power, however, his choice of John Thune for Senate majority leader is interesting – he has clashed with Trump before and was not Elon Musk’s choice for the role. This suggests two things: firstly, that the Trump administration could surprise us. Secondly, that although Republicans now control the main organs of power in the US, the President elect may not get his way on all matters. The question is whether this appointment will halt the Trump trade, stocks are pointing to a lower open in the US, although the dollar remains upbeat.

Trump trade focuses on dollar

The Trump trade has morphed from focusing on the stock market to focusing on a strong dollar and crypto currency gains. The dollar has also been given a boost by a murky outlook for inflation, which may impact Fed rate cuts in the future. The stock market rally is on pause, however, volatility remains low for US stocks, so we do not think that we will see any significant downside in US equities from here.

Burberry: earnings beat estimates, but remain in doldrums

There has been a plethora of earnings data from the UK this morning, including Burberry. The UK luxury goods giant has faced huge challenges in recent months and recently changed its CEO.  The news so far suggests that Burberry’s earnings have stabilized. Revenue was £1.09bn, vs. £1.08bn expected, retail sales revenues were stronger than expected at £885mn. However, the luxury goods giant still has a mountain to climb. Mainland China sales have slipped 24%, retail sales fell 21% YoY and the company made a loss in 1H of £41mn, vs. a profit of £233mn last year, however the loss was lower than expected. Added to that, although operating margins fell to -3.8% from 15.9% a year ago, this was also better than the expected -4.53%.

Burberry’s annus horribillus

Make no mistake, Burberry, listed on the FTSE 250, may not have performed as badly as expected, but China sales continue to tumble. The company has a long way to go and is not through its annus horribillis yet.

Burberry’s new CEO, Joshua Schulman, will unveil his turnaround strategy for Burberry later today and all eyes will be on this. There could big changes ahead, including a new strategy that may focus on affordable luxury, Schulman was the ex-CEO of Michael Kors before his Burberry job. He will also need to focus on new markets due to the continued slump in demand for luxury goods in China.

Burberry goes back to its roots

There could also be a move away from handbags and towards outerwear, which is a return to Burberry’s roots. There are questions over the future of Burberry’s artistic director, and there could be questions about the rumored takeover of Burberry by the Italian maker of expensive puffer jackets, Moncler.

The China question is interesting, these results do not consider the stimulus plan that was unveiled in September, and the surge in the Chinese stock market. Although the stimulus disappointed the market, there could be some benefit to Burberry’s China sales later this year. It will worth watching if Schulman gives an outlook for China sales.

What next for the share price?

Burberry’s shares have sunk into these results, and are down 11% in the past week, as Trump’s win in the election is seen as making it harder for luxury companies who have traditionally relied on China for a chunk of their sales. YTD, the share price is down nearly 50%. Thus, the stock market is likely to give an immediate reaction to Schulman’s strategy for the future, either the share price rises in a sign that it approves, or the share price falls further because it continues to think that Burberry will have an execution problem. Overall, UK stock market futures are pointing to a lower open later today.