Plunging Pound Helps Burberry While Hurting Ryanair

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 [e-mail] and Saabira Chaudhuri at [e-mail]

(END) Dow Jones Newswires

October 18, 2016 13:05 ET (17:05 GMT)

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