FTSE 100 dumps struggling British luxury brand

LONDON — British luxury fashion house Burberry Group abandoned in the UK FTSE 100 stock index on Wednesday, as falling sales and a series of management changes added to mounting pressures facing the 168-year-old retailer.

The company slipped out of the FTSE 250 during the September quarterly rebalancing, index provider FTSE Russell said in a statement, ending its 15-year run in the UK large-cap FTSE 100 index.

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

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

The stock has fallen more than 53% since the start of the 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 other FTSE 100 constituents, as well as some of the best-performing FTSE 250 players. As a result, funds that invest in the FTSE 100 will be exiting their Burberry holdings.

Burberry’s troubles long predate the recent share price drop.

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

The luxury brand’s entry into the FTSE 100 in September 2009 was seen as further evidence of its enduring appeal and resilience, even in the midst of 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 blow to the brand’s high-end aesthetic, from which it has struggled to recover.

Successive CEOs have tried to rehabilitate the company and elevate it to the status of a premium brand, but the market has not been convinced. The high turnover of senior executives (four CEOs have taken the position in the past decade) has also left investors worried.

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

Luca Solca, managing director and head of global luxury goods at Bernstein, said the former CEO of Coach and Michael Kors could try to revive the company by shifting the branding focus to a “British Coach” strategy. That would involve cutting costs, doubling the number of stores and increasing visibility with discount retailers.

“We have been advocating a ‘British coach’ strategy. The appointment of Josh Schulman, former CEO of MK and Coach, appears to be a step in that direction,” he told CNBC via email.

The new approach could provide a much-needed boost to the company’s struggling finances, Bernstein said. Burberry reported a 21% drop in same-store sales in the first quarter in July, prompting it to issue its third profit warning in 12 months and suspend dividend payments.

Analysts are now warning that the stock could fall further in the absence of a meaningful reset. “Current trading patterns indicate weak momentum in the Burberry brand that, in our view, needs to be corrected early enough for Burberry to contain any further share losses,” RBC analysts Piral Dadhania and Richard Chamberlain wrote in a note published in July.

According to Solca, this could make the company a takeover target. But if the management change works and the stock price recovers, “the probability of a takeover decreases,” he added.

Schulman is due to present a strategy update in November, with further changes expected at the top of the brand 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, CEO of Smead Capital Management, suggested that Schulman also take over as chairman, to allow him to quickly implement his strategy and restore investor confidence. Such a practice is unusual in British companies, but relatively normal in the United States.

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

Burberry is not alone in its decline. The luxury sector as a whole is suffering from a prolonged slowdown 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 weaker sales, particularly in the UK and China, while Gucci owner Kering issued weak guidance as a “marked slowdown in China” weighed on first-half revenue. LVMH Revenue also declined in the second quarter due to weaker sales in Asia, excluding Japan.

Some players, particularly in luxury, have managed to weather the storm. Richemont, owner of Cartier, reported record full-year sales in May, while Hermès sales rose 13% in the second quarter.

Smead said the slowdown demonstrated the cyclical nature of the luxury sector – an often overlooked factor – but also showed continued opportunities for Burberry to recover.

“The old adage is that if you’re going to fall behind, fall behind early. Burberry fell behind early and we think they’ll sort out their real problems sooner than other luxury players,” he said.

Smead added that he expects the company to eventually return to the FTSE 100, but that the new management is unlikely to restore its large dividend given the “lack of foresight” regarding previous payments.

Burberry’s half-year financial results are due to be released on November 14.