Burberry back in the trenches as its general departs

Stock markets offer a blunt measure of a man’s worth. Marco Gobbetti’s desire to spend more time in Italy cost Burberry as much as £930m in market value, while doing nothing whatsoever for that of his next employer, Salvatore Ferragamo.

Gobbetti’s sudden resignation on Monday after four years as chief executive means Burberry is on the hunt once again for a new leader. The job of running Britain’s only internationally recognised luxury goods label rarely wins many friends: conversations with shareholders often feature long digressions into what they disliked about previous management.

Accusations of self promotion and American brashness beset Angela Ahrendts, CEO from 2006 until 2014. Raincoat aficionados charged Rose Marie Bravo, her predecessor, with sacrificing the brand’s DNA in pursuit of trends. Creative director Christopher Bailey helped reclaim beige tartan from counterfeiters and chavs but following Ahrendts’ departure he was castigated as unqualified and too thin-skinned to run the company.

By contrast, Gobbetti has had an easy ride. His five-year plan has been judged a relative success, allowing for the fact that they were not the five years for which he planned. Pre-pandemic targets were hit. And whereas Bailey’s resistance to press interviews helped fix an image of being aloof and conceited, the same policy from Gobbetti is excused as quiet efficiency. It helps that he can rely on creative director and one-man publicity machine Riccardo Tisci.

This is, nevertheless, a job half done. Moving Burberry upmarket (the ambition of all its bosses for at least quarter of a century) required huge investment that has yet to pay out. Efforts to wean shoppers off discounts are a brake for sales growth but will only benefit profitability from next year at the earliest.

Pandemic distortions obscure all attempts to see whether Gobbetti’s strategy is working, or whether it’s a company in need of another five-year plan. Quarterly earnings due next month will show sales nearly doubling as America’s reopening adds to the continued revival in China. But if the recently lowered 2022 margin target proves too ambitious it will be new management that will be tasked with breaking the news.

There are reasons for caution. Pursuing younger customers online has not yet lifted Burberry into fashion’s top tier alongside Gucci, Dior and Moncler: a brand heat index compiled by fashion website Lyst rates the company 12th, down two places from its 2018 ranking. Margins have suffered on a push to sell handbags, which should be high-end luxury’s most profitable niche. Adding a leather goods business was a stated target in Burberry’s 2002 IPO prospectus, so it’s a very long term project.

Monday’s share price slump was in part on the fear that Tisci will follow Gobbetti to Ferragamo, which has a vacancy following the departure last month of creative director Paul Andrew. With Burberry only now beginning its search for a new CEO, the uncertainty speaks of a management vacuum below the top two.

And with uncertainty comes ever-present bid speculation. The shares had bounced back to just below its pre-pandemic high but have underperformed the luxury’s top tier of LVMH, Hermès and Richemont since the start of the pandemic as the wealth gap widened between haves and have-nots.

On the tier below are a number of rumoured takeover targets including Ralph Lauren and Hugo Boss. Ferragamo fits into the same category: its founding family has been churning through management and failing to fix the same problems of historic under-investment and brand exhaustion that Burberry has faced.

But Italian heritage luxury brands carry more cachet than British ones: hopes that the family will cut its majority stake have kept Ferragamo shares trading at around 56 times next year’s earnings, versus around 26 times for Burberry. Prestige matters.

By this time next year investors will have found a reason to complain about Gobbetti, just as they have about his predecessors. Their bet on Monday was for a stalled turnround rather than an opportunistic takeover bid. Awaiting evidence that Burberry’s brand has enough prestige value to tempt a rival, the caution looks warranted.