Plunging Pound Helps Burberry While Hurting Ryanair
October 18 2016 - 1:20PM
Dow Jones News
LONDON— Sterling's sharp slide is buffeting Ryanair Holdings
PLC, Europe's largest airline, but providing one of the continent's
best-known luxury brands, Burberry Group PLC, a much-needed
cushion.
The two on Tuesday reported sharply divergent fortunes that
exemplify the different directions in which Britain's fast-falling
pound is pulling some of the biggest companies in Europe. Sterling
is down some 19% against the dollar and 15% against the euro since
Britain's June 23 vote to leave the European Union.
Almost four months later, sterling weakness has morphed from
what many forecasters predicted would be short-term currency
volatility into a longer-term drag—or boon—for many big
corporations.
The latest slide, after British Prime Minister Theresa May this
month suggested the U.K. might pursue a "hard Brexit," has tipped
the scale for even the most resilient companies. Ryanair Chief
Executive Michael O'Leary told analysts the airline's profit
warning "was forced on us by the percentage of decline in sterling
over the last two weeks."
The difference was on full display Tuesday. Before the Brexit
vote, Ryanair, Europe's largest carrier by passengers, was enjoying
strong growth—flying packed planes even as it added aircraft and
destinations. Despite the currency headwinds, the airline expects
to sell about 94% of its seats this year. It forecasts that
passengers for the financial year through March 31 will increase
12% to 119 million, two million more than forecast only three
months ago. The carrier's net profit, which rose 43% last year, is
set to grow.
But sterling's slump is taking a big bite out of that profit
growth. The Dublin-based discount carrier brings in more than a
quarter of its global revenue in sterling. Those sales now are
worth less when converted into euros.
Ryanair warned Tuesday that net profit would advance 5% less
than initially forecast for the year. It now expects profit in the
range of €1.3 billion ($1.43 billion) to €1.35 billion in the year
through March, adjusted down from €1.375 billion to €1.425
billion.
Mr. O'Leary said additional erosion in the value of sterling
could force the company to revise its outlook down again. Bookings
are ahead of last year's pace, though Ryanair has had to offer
steep discounts to win those passengers.
To help mitigate the currency headwind, Mr. O'Leary said the
airline would trim its planned non-U.K. growth for next summer to
around 5% from double-digit expectations.
By contrast, underperforming luxury-goods maker Burberry
reported a 5% jump in first-half revenue on Tuesday thanks to the
falling pound. Underlying sales of its iconic trench coats, purses
and other luxury products fell 4%. But because the pound has fallen
so sharply, and most of those weaker sales were made overseas,
Burberry more than made up for the shortfall because of the
currency differences.
For Burberry CEO Christopher Bailey, who is stepping down from
the CEO role next year after more than two years trying to stem
Burberry's weakness, the currency tailwinds have provided a modest
respite. Mr. Bailey will remain creative director and will continue
as CEO until his replacement takes the reins, leaving the company
in an unusual interregnum that could yet take the better part of a
year. Meanwhile, he is cutting costs and planning to unveil next
month the results of his turnaround effort so far.
The company saw another advantage from sterling weakness: It
reported a big a boost in sales in the U.K., which usually makes up
about 10% of overall revenue but lately has made up 15%. Burberry
said U.K. same-store sales in the second quarter rose 30%. The
falling pound has triggered a British tourism boom among
bargain-seeking foreigners. Chief Financial Officer Carol
Fairweather said Tuesday the company's U.K. stores had welcomed
more shoppers from China, continental Europe and the Middle
East.
Ms. Fairweather said the company currently has no plans to raise
product prices in the U.K.
Investors on Tuesday looked past the bottom-line currency
effects and focused on the companies' underlying performance. In
afternoon trading, Ryanair shares were up 2.4% to €12.09 in Dublin,
while Burberry shares were down 7.7% to £ 13.97 in London.
Write to Robert Wall at robert.wall@wsj.com and Saabira
Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
October 18, 2016 13:05 ET (17:05 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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