12 November 2015

Burberry Group plc

Interim results for the six months ended 30 September 2015

Burberry delivers robust performance amidst challenging environment for luxury.  Adjusted retail/wholesale profit up 5% underlying.

Highlights for the six months to 30 September 2015

·    Robust financial performance in a challenging environment for luxury

-       Revenue £1,105m, unchanged year-on-year

-       Adjusted retail/wholesale profit up 5% underlying (up 4% at reported FX)

- As planned, licensing profit down 13% underlying, as Japanese licences expire (down 21% at reported FX)

- Resulting in adjusted profit before tax of £153m, up 3% underlying

-       Reported PBT £155m (2014: £142m), up 9%

-       Net cash of £459m at September 2015 (2014: £307m)

-       Interim dividend up 5% to 10.2p

·    Further building brand and business momentum

-       Over 11m views of our festive film across social platforms within first 48 hours

-       Combining our three labels to reduce complexity for customers and our business

-       Increasing our capacity to manufacture trench coats in Yorkshire, England

-       Making good progress in transforming Japanese operations

-       Expanding global distribution of Beauty in store and online with key partners

-       Comparable sales since the start of Q3 have improved relative to Q2

Christopher Bailey, Chief Creative and Chief Executive Officer, commented:

"This robust performance reflects decisive action as the external environment became more challenging in key markets over the period.  We enter the second half mindful of this backdrop, but confident in our strongest-ever festive plans and emphasis on productivity and efficiency.

Beyond these immediate priorities, we remain focused on building Burberry for long-term, sustainable growth and value creation.  In an evolving luxury environment, we see compelling opportunities by channel, region and product, underpinned by the strength and distinctiveness of our authentic British brand."

All metrics and commentary in the Group Financial Highlights and Interim Management Report exclude adjusting items unless stated otherwise.

Adjusting items are:

·      A charge of £7.5m in reported operating expenses being the amortisation of the fragrance and beauty licence intangible asset (H1 2014: £7.5m)

·      Put option liability finance income of £9.3m in the reported net finance income relating to the third party 15% economic interest in the Chinese business (H1 2014: a charge of £3.0m)

Details of adjusting items are contained in Note 4 of the Condensed Consolidated Interim Financial Statements. 

Underlying performance is presented in this announcement as, in the opinion of the Directors, it provides additional understanding of the ongoing performance of the Group.  Underlying performance is calculated before adjusting items and removes the effect of changes in exchange rates, compared to the prior period. This takes into account both the impact of the movement in exchange rates on the translation of overseas subsidiaries' results and also on foreign currency procurement and sales through the Group's UK supply chain.

Certain financial data within this announcement have been rounded.

Enquiries

·      There will be a presentation today at 9.30am (UK time) at Horseferry House, Horseferry Road, London, SW1P 2AW

·      The presentation can be viewed live on the Burberry website www.burberryplc.com and can also be accessed live via a listen only dial-in facility on +44 (0)20 3003 2666 (password: Burberry investor call) 

·      The supporting slides and an indexed replay will be available on the website later in the day

·      Burberry will update on third quarter trading on 14 January 2016

Certain statements made in this announcement are forward-looking statements.  Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from any expected future results in forward-looking statements.  Burberry Group plc undertakes no obligation to update these forward-looking statements and will not publicly release any revisions it may make to these forward-looking statements that may result from events or circumstances arising after the date of this document.  Nothing in this announcement should be construed as a profit forecast.  All persons, wherever located, should consult any additional disclosures that Burberry Group plc may make in any regulatory announcements or documents which it publishes.  All persons, wherever located, should take note of these disclosures.  This announcement does not constitute an invitation to underwrite, subscribe for or otherwise acquire or dispose of any Burberry Group plc shares, in the UK, or in the US, or under the US Securities Act 1933 or in any other jurisdiction.

Burberry is listed on the London Stock Exchange (BRBY.L) and is a constituent of the FTSE 100 index. ADR symbol OTC:BURBY.

BURBERRY, the Equestrian Knight Device and the Burberry Check are trademarks belonging to Burberry which are registered and enforced worldwide.

Group financial highlights

Total revenue £1,105m, unchanged year-on-year

Retail/wholesale revenue £1,078m, up 1% underlying; adjusted retail/wholesale operating profit £130m, up 5% underlying, including around a £30m reduction in performance-related pay

Licensing profit of £22m, down 13% underlying, reflecting the planned expiry of Japanese licences

Resulting in adjusted profit before tax of £153m, up 3% underlying, unchanged at reported FX (exchange rate impact £3m).  Reported profit before tax £155m (H1 2014: £142m)

Adjusted diluted EPS up 2% to 26.0p (H1 2014: 25.4p), with 23% effective tax rate.  Reported diluted EPS up 14% reflecting movement in adjusting items

Interim dividend up 5% to 10.2p (H1 2014: 9.7p), as we move towards our target dividend payout ratio of around 50% (based on adjusted diluted EPS) in FY 2016

Net cash of £459m at 30 September 2015 (2014: £307m); £80m capital expenditure in first half; inventory down 2% at constant exchange rates year-on-year

Adjusted measures exclude adjusting items

* Excludes adjusting items.  For detail, please see page 2

^~ EPS is presented on a diluted basis

INTERIM MANAGEMENT REPORT

Burberry delivered a robust financial performance in the first half, against a background of a challenging environment for luxury, amplified by our geographic mix. 

·    Retail/wholesale revenue increased 1% underlying, with adjusted operating profit up 5% underlying, including accelerated actions to control discretionary costs and a reduction in performance-related pay. 

·    As planned, licensing profit was down 13% underlying, as the Japanese licences expired and we took direct control in the market.

·    As a result, total group revenue was unchanged year-on-year, while adjusted profit before tax was up 3% underlying. 

In response to this challenging environment, and ahead of our key festive period, we have further strengthened initiatives online and offline

·    Product - fast tracking best sellers and optimising our iconic products including heritage trench coats, scarves and cashmere.

·    Customer service - using our analytical tools to drive more personalised service.

·    Marketing - using data to reallocate our marketing spend more tactically, while protecting investment behind the brand, especially around the new festive campaign.

Since the start of the third quarter, comparable sales, although volatile, have improved overall relative to the second quarter.  Ahead of the key festive period, we continue to assume mid single-digit percentage growth in comparable sales in the second half, but the external environment remains challenging and uncertain.

We have also sharpened focus on our strategic agenda to enhance productivity and efficiency, with initiatives underway across retail, product and processes

·    Tight management of costs - including hiring, travel and expenses and other discretionary spend, saving about £20m against plan in the full year.

·    The move to one label from three - providing a more consistent brand experience for customers, while reducing internal complexity.

·    Upgrading our core IT platform - to deliver operational efficiencies over time.

We also continue to invest in long-term opportunities

·    UK manufacturing - where we plan to invest over £50m in the coming years in a new trench coat manufacturing and weaving facility in Yorkshire, England.

·    By market - building our retail operation in Japan and repositioning the brand in the United States.

·    By product - where we are underpenetrated in Beauty and leather goods in particular.

Core strategies 

During the half, we have made further progress under each of our six core strategies.

Inspire with the brand

Through a co-ordinated programme of events, we have further reinforced our distinctive British heritage with luxury customers.  We celebrated store openings around the world from Los Angeles to Tokyo and Seoul.  The latter two events showcased to customers for the first time in store the skills of hand stitching on our heritage trench coat and monogramming for scarves and bags.  This is a new format for store events emphasising craftsmanship and personalisation. 

Digital innovation and partnerships drove awareness and engagement.  As part of the Spring/Summer 2016 womenswear show, we partnered with Snapchat to preview the collection the evening before to the platform's 100 million users, with content viewed over 200 million times.  We also partnered with LINE, the largest messaging app in Japan, to livestream the show and to celebrate the launch of Burberry Beauty, offering their users the opportunity to purchase a selection of exclusive beauty products directly on the new LINE Pay platform.  We also opened an account on Kakao, the largest messaging app in Korea, to share our brand content with their users.  As British music features prominently in all our events, we were the first brand to curate a dedicated channel on Apple Music.  Burberry now has about 38m followers across its social media platforms globally, up over 30% on last year.

We continued to focus on better understanding and connecting with our customers.  We capture data in about 85% of transactions and now have over ten million customers in our database.  Our Customer Value Management (CVM) programme, which uses this data, is now live in 380 stores globally.  It enables more targeted, relevant and personalised contact with our most important customers, driving increased conversion and spend.  In addition, we are using data and analytics to further refine our marketing effectiveness in terms of timing, mix and level of investment, reallocating marketing spend to specific customer groups and products as appropriate. 

Realise product potential

We continued to develop our outerwear offer.  Building on the success of the focused heritage trench coat assortment, fully launched in September last year, we have added two new colours, parade red and navy, from this September.  We have also seen early pleasing results from a new collection of lightweight cashmere trench coats in 14 colours for the autumn season.

We launched the Scarf Bar initiative both online and in store in September 2015, asserting our ownership of cashmere scarves.  The Scarf Bar offers over 30 colours across both signature and lightweight cashmere fabrications, both solid and check, all available for monogramming online.  The launch has been supported by new presentations in store and online and a dedicated marketing strategy, including customer emails with an image of their own personalised scarf.  In the run-up to the key gifting period, in-store training and service initiatives have been introduced focusing on the provenance and craftsmanship of this product.

We expanded our Beauty distribution with Sephora globally and with Shiseido in Japan.  Burberry make-up launched digitally on Sephora.com in August and was subsequently rolled out to an initial 34 Sephora stores, including their Champs Elysees, Paris flagship, with plans to expand the distribution over the next year.  As the first phase of our new distribution partnership with Shiseido in Japan, the My Burberry fragrance was launched in June.  This was followed by the opening of the first two Burberry Beauty Box counters in department stores in Tokyo and Osaka.  These counters, based on the standalone Beauty Box store concept, offer make-up, fragrance and gifting items.  Shiseido will continue to open additional counters in Japan, supporting the development of both Beauty and our brand in this market.

Optimise channels

Burberry opened 13 mainline stores and closed nine during the first half.  Openings included stores in the flagship markets of Dubai, London, New York, Seoul and Tokyo.  For the full year, we plan to open about 15-20 mainline stores and close a similar number.  Capital expenditure is planned at around £180m for FY 2016.

Burberry.com remains at the heart of our digital strategy and we continue to invest to ensure we are responding to the evolving needs of our customers. Launched last year, our improved mobile functionality has supported the tripling of penetration of mobile sales year-on-year.  During the first half, we have improved the tablet platform, refined checkout and payment tools and are now testing the single pool of inventory model in the UK and US following successful implementation in China.

To complement burberry.com, we continue to partner with third parties, providing a brand appropriate experience to those luxury consumers who want to research and buy online, but on other platforms.  Revenue from third party digital partners in the half was up by a double-digit percentage.  In the first half, we also built brand rooms on over 15 different platforms for both fashion and beauty, with existing wholesale partners as well as pure digital and social commerce players.

Unlock market opportunity

Our geographic mix amplified the impact on our revenue of the challenging external environment for the Chinese luxury consumer.  Looking at our Chinese customers, about half of their spend was in mainland China, about 20% in the rest of Asia Pacific (the majority in Hong Kong), 25% in EMEIA and 5% in the Americas.  We continued to see growth globally from Chinese customers in the half, although this softened in the second quarter both in mainland China and when travelling.  Our Japanese business, which only currently accounts for around 2% of global retail/wholesale revenue (well below luxury peers) did benefit from Chinese spend.    Within EMEIA, we saw strong double-digit percentage growth from travelling Chinese customers in continental Europe, but there was more muted growth in the UK (over one-third of the region's retail revenue), given the relative strength of sterling against the euro. 

With the expiry of the Burberry licences in June, we continued to intensify our efforts in Japan.  During the half, we expanded our retail footprint, with the opening of our sixth free-standing store in Shinjuku, Tokyo and a further six department store concessions, bringing the total to 19.  We also assumed operation of ten childrenswear concessions.  Our retail operations, serving a predominantly domestic customer base, continued to post strong results in the half, with comparable sales growth well in excess of 50%, albeit off a small base. 

Our investment in emerging markets with long-term growth potential continued.  During the half, we moved to direct operation in Russia and Bahrain, opening two mainline stores in Moscow and one in Bahrain and closing the franchise stores in these markets.  A second franchise store was opened in both South Africa and Panama.

Pursue operational excellence

Burberry plans to develop a new state-of-the-art manufacturing and weaving facility in Yorkshire, England.  The initial investment will be over £50m, with work on the new site due to begin in 2016 with a current completion date of 2019.  The new facility, which will bring all manufacturing employees together under one roof, will offer increased capacity for trench coat production, more sustainable and efficient ways of manufacturing and the potential to produce other outerwear categories at the site.

To reduce complexity for our customers and internally, we are unifying our Prorsum, London and Brit collections under a new single Burberry label.  The transition will be introduced into stores worldwide by the end of 2016.  This move will offer customers a more consistent and intuitive experience across our existing collections, while reducing internal complexity across product and processes. 

During the half, we completed the first steps in upgrading our core IT systems, by migrating our physical data centre to SAP's cloud-based service and then transferring applications on to their new database technology (HANA).  The benefits of this will be real time, faster in-database processing, enabling better, more responsive decision-making throughout the business.  This is the initial phase of a multi-stage programme which will support our future growth ambitions and deliver operational efficiencies as we implement it over the coming years.

Build our culture

Burberry was included for the first time in the 2015 Dow Jones Sustainability Index, being recognised as one of the top performing companies globally in our sector for corporate sustainability.  Our inclusion reflects the focus, importance and integrated approach that we place on our commitment to drive positive environmental and social change globally.

We believe that it is important to be a socially responsible business.  During our summer "Engage" programme, our employees dedicated more than 5,000 hours to making a difference in our communities, inspiring young people, supporting families in need and helping with community revitalisation projects in 80 cities around the world.

Revenue analysis

Revenue by channel

Retail

70% of revenue; with 218 mainline stores, 218 concessions within department stores, digital commerce and 57 outlets

·    Retail sales up 2% underlying; up 3% at reported FX

·    Comparable sales increased by 1% (Q1: up 6%; Q2: down 4%)

·    New space contributed the balance of growth at 1%

·    Digital outperformed

In the second quarter, demand from luxury consumers, particularly Chinese customers, was affected by a more challenging external environment.  For Burberry, the impact was amplified by our geographic mix.  Comparable sales increased by 6% in the first quarter and declined by 4% in the second quarter, with a slowdown in all regions.  This reflected a decline in the number of transactions partly offset by an increase in average selling price.  Digital continued to outperform in the half, although it too slowed in the second quarter, reflecting softer demand from domestic consumers, digital's primary customer base.

In mainline retail, the performance of apparel and accessories, and fashion and replenishment, was similar throughout the half.  Apparel slowed more than accessories in the second quarter, with weakness from outerwear excluding rainwear in particular.  Sales of heritage trench coats and cashmere scarves were strong, as were ponchos and dresses. Within large leather goods, we saw good performance from the Banner bag, an evolution of our iconic tote, and from smaller versions of many of our key shapes.

Asia Pacific

With retail accounting for about 85% of revenue in the region, Asia Pacific delivered a mid single-digit percentage comparable sales decline in the half.  This was impacted by a further year-on-year deceleration in Hong Kong in the second quarter compared to the first, as footfall continued to decline.  Mainland China comparable sales decreased slightly in the half, in the context of weakening consumer sentiment in the market in the second quarter.  Japan saw comparable sales growth well in excess of 50%, albeit off a small base.

Excluding Hong Kong and Macau, comparable sales in the first half were broadly unchanged year-on-year. 

During the first half, we opened a net ten mainline stores and concessions (24 openings and 14 closures), as we build our retail footprint in Japan and continue to evolve the store network in both China (a net three closures resulting in a total of 65 stores) and South Korea (with five closures and three openings), including our first free-standing store in Seoul.

Europe, Middle East, India and Africa (EMEIA)

Retail accounted for over 65% of EMEIA's revenue.  The region delivered double-digit percentage comparable sales growth in the half, although growth moderated in the second quarter.  With the travelling luxury customer generating about 60% of the region's revenue, we saw comparable sales growth in the first half in Italy, France and Spain in excess of 20%.  This significantly outperformed the UK (over one-third of EMEIA's retail revenue), given sterling's relative strength against the euro.

During the first half, we opened eight and closed nine mainline stores and concessions, with the closures mainly smaller stores outside flagship markets.  We continued to build our presence in under-penetrated markets, with four mainline store openings in the Middle East and two in Russia.  We also expanded our Regent Street flagship store with an exclusive area - Thomas's - dedicated to gifting and dining. 

Americas

With retail accounting for over 60% of sales, the Americas delivered low single-digit percentage comparable growth in the first half.  Our directly-operated businesses in Canada, Brazil and Mexico (over 15% of Americas' retail revenue) delivered double-digit percentage comparable sales growth in the period.  The United States slowed in the second quarter, primarily reflecting uneven demand from both the domestic and tourist consumer.

New York was the focus of store investment during the half, with the re-opening of the expanded and refurbished store on Spring Street, Soho, an additional store in lower Manhattan and the closure of a Brit store. 

Wholesale

28% of revenue; generated from sales of apparel and accessories to department stores, multi-brand specialty accounts, franchise stores and travel retail; as well as beauty to around 80 distributors worldwide

·    Wholesale revenue down 3% underlying; down 4% at reported FX, broadly consistent with guidance

·    Apparel and accessories down by a mid single-digit percentage underlying, partly reflecting further account rationalisation and a move in certain markets to retail

·    Beauty up by a low single-digit percentage underlying

·    At 30 September 2015, Burberry had 60 franchise stores globally

The regional comments below are for apparel and accessories and exclude beauty.

Asia Pacific

Wholesale revenue in Asia Pacific saw a double-digit percentage underlying sales decline in the first half, largely reflecting falling demand from travel retail customers, particularly in Hong Kong, Macau and Korea.  As part of the transition in Japan, we also completed our exit from existing wholesale accounts in this market.

Europe, Middle East, India and Africa

EMEIA remains the group's largest wholesale region at about 45% of the total. 

It declined by a mid single-digit percentage as planned, with double-digit percentage growth from new and existing accounts more than offset by continuing account rationalisation and the impact of Russia and Bahrain moving to direct operation.

Americas

The Americas, which accounts for about 35% of group wholesale revenue, delivered low single-digit percentage growth, benefiting from some re-phasing of deliveries into the first half from the second half of this year.  Underlying demand was subdued, reflecting a more difficult external environment for department store customers in the United States.

Beauty

In Beauty, wholesale revenue grew by a low single-digit percentage underlying compared to last year, which included the product sell-in ahead of the My Burberry fragrance launch in September 2014.  During the first half, we introduced product extensions including Brit Splash and My Burberry eau de toilette, maintaining the momentum behind our pillar fragrances.  External sell-out data shows Burberry outperforming the total fragrance market in key regions since the start of the calendar year.

Licensing

2% of revenue; of which about 60% is from Japan, with the balance from global product licences and European wholesale childrenswear

·    Licensing revenue decreased by 18% underlying; down 25% at reported FX

·    Consistent with full year guidance

Reflecting the impact of the planned expiry of the Japanese licences and the transition payments, royalty income from Japan was £17m at constant exchange rates, down about 40% on the first half last year.  In the second half, royalty income from Japan is expected to decline, as guided, to about £10m (from £25m in H2 2014/15), reflecting the licence transition payment and income from the new licence for Black and Blue labels (now branded Crestbridge).

During the half, in eyewear, we launched the "Gabardine" and the first men's only "Sartorial" collections, both at a more elevated positioning and delivering positive results. Growth from our global product licences included a phasing benefit.

Operating profit analysis

Adjusted operating profit

Adjusted operating profit increased by 2% underlying in the first half, reflecting 5% underlying growth from retail/wholesale and the planned decline from Japanese licensing. At reported FX, adjusted operating profit was unchanged year-on-year at £151.7m, with a slight adverse impact from exchange rates of £3.5m.

Adjusted retail/wholesale operating profit

Retail/wholesale adjusted operating profit increased by 5% underlying, up 4% at reported FX after a £1.1m adverse impact from exchange rate movements.

Gross margin was 68.7% (up 100 basis points) primarily reflecting

·    A one-off inventory charge relating to a previous fragrance launch in the first half of last year which did not repeat this year

·    Positive channel mix being offset by negative geographic mix

·    A marginally positive FX impact. 

Operating expenses of £611m include a benefit of about £30m from a reduced performance-related pay charge compared to the prior year.  Excluding this

·    The majority of the increase in expenses came from net new space

·    Investment in marketing and technology was increased

·    While general inflation and a small adverse FX impact were offset by lower variable costs and tight management of discretionary costs.

The operating expenses to sales ratio was 56.7%, up 70 basis points compared to the prior year. 

Licensing operating profit

Licensing revenue decreased by 18% underlying, down 25% at reported FX including an adverse exchange rate impact of £2.4m.  With lower operating expenses, licensing profit was £22.0m, down 13% underlying (down 21% at reported FX).

Adjusting items

The charge of £7.5m relates to the amortisation of the fragrance and beauty licence intangible asset of £70.9m, which was recognised in FY 2013.  This is being amortised on a straight line basis over the period 1 April 2013 to 31 December 2017.  The China put option liability finance income relates to fair value movements, including the discount unwind, on the put option liability over the non-controlling interest in the acquired Chinese business.  The income of £9.3m in the first half, compared to a £3.0m charge in the first half last year, largely reflects lower long-term growth forecasts for the business in China.

Taxation

The effective rate of tax on adjusted profit for FY 2016 is estimated to be 23.0% (FY 2015: 23.4%).  This 23.0% is the rate applied in H1 2015 (H1 2014: 23.0%).  Tax on adjusting items has been recognised as appropriate.  The resulting effective tax rate on H1 2015 reported profit is 21.8% (H1 2014: 23.6%).

Cash

Net cash at 30 September 2015 was £459m, compared to £307m at 30 September 2014 and £552m at 31 March 2015.  Major outflows in the first half included £112m on dividends, £80m on capital expenditure and £57m on working capital, much of which was seasonal.  Inventory at 30 September 2015 was £478m (September 2014: £483m), down 2% at constant exchange rates, benefiting from our investment in planning teams and technology.

Outlook

Retail:  In FY 2016, net new space is expected to contribute low single-digit percentage growth to total retail revenue. 

Wholesale:  Burberry expects total wholesale revenue at constant exchange rates in the six months to 31 March 2016 to be broadly unchanged on the same period last year (H2 2014/15: £331m). 

·    In apparel and accessories, an underlying mid single-digit percentage decline reflects cautious ordering by wholesale customers globally, as well as the re-phasing of orders in the Americas into the first half from the second half of this year. 

·    Double-digit percentage underlying growth is expected in Beauty in the second half, driven by sales to distributors of our new male fragrance, Mr Burberry, offset by some destocking.

Retail/wholesale profit:  In FY 2016, if exchange rates* remain at current levels, our latest expectation is that there will be no material benefit to FY 2016 reported retail/wholesale profit compared to FY 2015 rates.  This compares to an expected benefit of about £10m at the time of the First Half Trading Update based on 30 September 2015 effective rates.

Licensing:  Total licensing revenue for FY 2016 is planned to be down by about 40% at constant exchange rates (FY 2015: £68m), due to the expiry of the Japan Burberry licences.  For FY 2016, we continue to expect double-digit percentage growth from the global product licences and about £25m revenue from Japan.  At current exchange rates*, the impact of the movement in the sterling/yen rate on reported licensing revenue in FY 2016 is not expected to be material.

Capital expenditure:  Spend of around £180m is still planned for FY 2016.

* See Appendix

APPENDIX

Exchange rates

^~ For licensing revenue, taking into account the current hedged positions

Retail/wholesale revenue by destination

Retail/wholesale revenue by product division

Store portfolio

Store portfolio by region

Related parties

Related party disclosures are given in note 15 of the Condensed Consolidated Interim Financial Statements.

Principal risks

The Group carried out a formal process throughout the period to identify, evaluate and manage significant risks faced by the Group.  In the view of the directors, the principal risks and uncertainties affecting the Group for the remaining six months of the financial year comprise those set out on pages 56 to 59 of the Annual Report for the year ended 31 March 2015 (a copy of which is available at the Group's website at www.burberryplc.com) and which are summarised below. 

These principal risks and uncertainties have remained unchanged subject to the following:

·    The sustained economic slowdown has continued and, in particular, the external environment has become more challenging for the luxury sector affecting consumer demand, particularly in relation to Chinese consumers.

·    The Burberry brand licence with Sanyo Shokai and Mitsui & Company in Japan expired in June 2015, whereupon the royalty income under this licence has ceased.

Summary of principal risks set out in the Annual Report

Dependence on IT systems and operational infrastructure

The Group's operations depend on IT systems and operational infrastructure in order to trade efficiently.  Increasingly, technology is also being used to stream major events and to communicate through social media.  A failure in these systems, or a denial of service, could have a significant impact on the Group's operations and reputation, and potentially result in the loss of sensitive information.

Sustained economic slowdown

The Group's performance remains strong; however, the sustained economic slowdown has or could: (i) reduce consumer wealth leading to a reduction in demand; (ii) impact the financial stability of suppliers and their ability to secure finance which could disrupt the Group's supply chain or lead to an increase in bad debts; and (iii) impact the financial stability and recovery of banks and other financial institutions, all of which would impact sales and profitability.

Dependence on consumers from the Asia region

The Group's revenues are increasingly dependent on consumers from the Asia region.  A significant proportion of the Group's sales are to Asian consumers globally.  Consequently, any change to consumer tastes or the economic, regulatory, social and/or political environment in Asia could adversely impact Asian consumers' disposable income, confidence and travel which could impact the Group's revenue and profits.   

Major incidents

Major incidents such as natural catastrophes, global pandemics or terrorist attacks affecting one or more of the Group's key locations could significantly impact its operations.  A major incident at a key location could significantly impact business operations, with the impact clearly varying depending on the location and its nature.  The impact of the loss of a distribution hub would clearly differ from a global pandemic, but both would impact revenues and profits.

Volatility in foreign exchange rates

The Group operates on a global basis and earns revenues, incurs costs and makes investments in a number of currencies.  The Group's financial results are reported in Sterling.  The majority of reported revenues are earned in non-sterling currencies, with a significant proportion of costs in Sterling.  Therefore the Sterling value of reported revenues, profits and cash flows may be reduced as a result of currency exchange rate movements.

Non-compliance with ethical and environmental standards

A failure by the Group or associated third parties to act in accordance with ethical and environmental standards could result in penalties, adverse press coverage and reputational damage with a resulting drop in sales and profit.

Non-compliance with legislation and regulation

The Group's operations are subject to a broad spectrum of regulatory requirements in the various jurisdictions in which the Group operates.  The pace of change and the consistency of application of legislation can vary significantly across these jurisdictions, particularly in an environment where public sector debt is often high and tax revenues are falling.  Failure to comply with these requirements could leave the Group open to civil and/or criminal legal challenge, significant penalties and reputational damage.

Over-reliance on key vendors

The Group relies on a small number of vendors in key product categories, and for specialist digital and IT services.  Failure of one of these businesses to deliver products or services would have a significant impact on business operations.

Loss of key management or the inability to attract and retain key employees

The loss of key individuals or the inability to recruit and retain individuals with the relevant talent and experience would disrupt the operation of the business and adversely impact the Group's ability to deliver its strategies.

Stability of emerging markets

The Group operates in a number of emerging markets which are typically more volatile than developed markets, and are subject to changing economic, regulatory, social and political developments that are beyond the Group's control.  Infrastructure and services also tend to be less developed.  This could result in the seizure of assets or staff, related party business practice that is inconsistent with the Group's ethical standards and the UK regulatory environment, and increased operational costs due to country specific processes driven by the regulatory environment.  

Significant growth and pace of change

The significant growth and pace of change within the business puts pressure on both internal and external resources. Failure to effectively manage the pace of change will inevitably adversely impact the Group's operations and return on investment.

Reliance upon the Group's licensed business in Japan and other key licensed product categories

A substantial proportion of Group profits is reliant upon its licensed business in Japan and other key licensed product categories.  The licence with Sanyo Shokai and Mitsui & Company in Japan expires in 2015, whereupon the royalty income under the licence will cease.  The Group expects licensees to maintain operational and financial control over their businesses.  Should licensees fail to manage their operations effectively or be affected by a major incident, the royalty income may decline, directly impacting Group profits.

Unauthorised use of the Group's trademarks and other proprietary rights 

Trademarks and other intellectual property (IP) rights are fundamentally important to the Group's reputation, success and competitive position.  Unauthorised use of these, as well as the distribution of counterfeit products, damages the Burberry brand image and profits.

CONDENSED GROUP INCOME STATEMENT - UNAUDITED