Negative Initial Market Reaction to Changes at Top of Burberry

Negative Initial Market Reaction to Changes at Top of Burberry

Burberry’s executive makeover leaves the British apparel maker with plenty to prove. Angela Ahrendts, chief executive of the $ 11 billion fashion house, is leaving next year to run Apple’s retail operation. News of her departure lopped 4.5 percent off Burberry shares on Tuesday morning.

No wonder: her tenure was good for investors. Worse, Burberry is flirting with a risky concentration of power. It is replacing Ms. Ahrendts with the company’s creative director, Christopher Bailey. But he will keep his current job.

It is easy to see what drew the technology-savvy Ms. Ahrendts to California. She’ll no longer be the leader. But she will oversee both Apple Stores and online sales. Apple is also a more prestigious berth than Burberry, at least in business circles, and is much bigger, too. Pay and perks will probably reflect this. Last year, Ms. Ahrendts got 3.3 million pounds, or $ 5.2 million from Burberry. Contrast that with the terms that John Browett, the former Dixons boss, got when he went to Appe. Last year, he was, briefly, given a narrower retail role there. That did not work out. But if it had, he would have pocketed $ 56 million of stock.

There are three obvious reasons for the negative Burberry market reaction. First, simply, investors hate surprises, especially in a glitzy, high-growth company whose shares enjoy correspondingly lofty valuations.

Second, the company’s owners are losing a good steward of the business. Since Ms. Ahrendts became the chief executive in 2006, Burberry shareholders have enjoyed a handsome 340 percent total return. The FTSE 100 only managed 46 percent. Louis Vuitton’s parent LVMH has returned 109 percent.

The third reason is Burberry’s unusual response. It has elevated its star designer, Mr. Bailey, to chief executive. Alongside Ms. Ahrendts, Mr. Bailey, the former Gucci women’s wear boss, has been central to Burberry’s renaissance. Yet creative types rarely make successful bosses of big public companies. He will also be paired with an inexperienced chief financial officer, Carol Fairweather, whose predecessor, Stacey Cartwright, left in February. A veteran chairman and a recently hired operating chief mitigate this somewhat.

Still, Mr. Bailey may be stretched uncomfortably across the two roles. Burberry sells a $ 325 check flat cap and a $ 650 felted wool number. Both are fine bits of headgear, but no one would wear the two together. Likewise, FTSE 100 chief executives look best wearing just the one hat.

Quentin Webb is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

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