By Sally Shin, CNBC.com
High street retailers have had a tough year in 2011, but Burberry is bucking the trend.
A global slowdown and Europe's still-unfolding sovereign debt crisis sets a dark cloud over the luxury market, but the British maker of trenchcoats and handbags turned in strong results earlier Tuesday.
Emma Watson wearing a white one-shouldered custom-made Burberry dress with a central split.Burberry said its revenues rose to £574 million ($879.7 million), a rise of 22 percent in its fiscal third quarter. The boost in Burberry's sales came mostly from growing emerging markets, especially China.
Shares of Burberry in its home market have gained more than 20 percent for the year. But the other ultra-high end retailers haven't been as lucky. Prada is down 12 percent, PPR, which owns Gucci and Yves Saint Laurent, is down one percent and LVMH Moet Hennessy Louis Vuitton remains flat for the same 52-week period.
While many of these European fashion houses suffered, unable to win market share from more cautious luxury customers, Burberry has been tackling all fronts of its business with full force, from hedging against the euro zone crisis to allocating capital for expansion, and so far investors have been noticing.
For one, the story lies in the weak euro, says Mike Moriarty, Partner at the retail consulting firm A.T. Kearney. As the euro continues to suffer to new lows against the major currencies, including the pound, in which Burberry is denominated, it has helped boost shares of Burberry along with the broader FTSE 100.
On the structural front, a successful merging of tradition and trend has been a successful growth story for Burberry, one which has bode well for Asian consumers. Its iconic check trench coats have been a staple in many closets for decades, and continue to be a must-have item today.
"Burberry has a long story, they are an Asia story and they have it figured it out. The Asian consumer loves a very traditional story," Moriarty told CNBC. Chinese customers, alone, account for 10 percent of Burberry's total sales.
"When you go to London's flagship stores, about a third of the customers are Chinese," said Stacey Widlitz of S.W. Retail Advisors. "Burberry is doing the right thing by investing in their flagships and expanding its stores."
The retailer plans to invest as much as $300 million to revamp its flagship stores this year. It is also investing in technology and social media, revamping its website and tapping into SAP technology for efficient ecommerce sales. And judging from the latest earnings report, Burberry's investments are paying off.
"Our investment in flagship market and digital technology has enabled our global teams to continue to drive customer engagement, enhance retail disciplines and improve operational effectiveness, further strengthening brand momentum," Angela Ahrendts, Burberry's Chief Executive Officer said in the report.
But although the strategy that is working for Burberry right now, Widlitz says take caution when looking at a company that is spending cash, as its large capital investments could backfire if the luxury market reverses its course.
Burberry also has room to grow within its product line. Compared with its peers, accessories make-up a relatively small portion of its sales. Hermes, for example, gets about 60 percent of its total sales from the category, while LVMH accessories account for 40 percent of its total sales.
So far, since becoming CEO in 2006, Angela Ahrendts has been hitting the right fashion notes. She has brought innovative ways to transform the iconic brand, including adding fresh faces Cara Delevigne and Emma Watson as spokespersons, and fusing runway fashion to its traditional trenches.
The street has mixed feelings about the future of the luxury market. JPMorgan Cazenove in London, for one, has a "cautious stance" for fiscal year 2012 on the overall luxury goods sector but it remains bullish on the long-term fundamentals. In its report, the firm said the opportunities lie in "increased penetration in China, untapped opportunities in other emerging markets, sustained appeal in mature markets," which Burberry has tapped into.
Burberry is defying what other luxury retailers are struggling with in this economy. It has found its niche client-base, hedged against economic slowdown and increasing its profit margins. The checkers are aligning for them, at least for now.
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By Sally Shin, CNBC.com