Burberry store spree will cut profit

London: Burberry Group Plc, the UK's largest luxury-goods company, said profitability may decline in the first half of the fiscal year as it boosts spending on new stores and digital platforms.

Investment will be weighted towards the first six months of the year. The company still expects a "modest" improvement in the operating margin of its retail and wholesale businesses for the year, it said yesterday after reporting a 26 per cent profit increase that met analysts' estimates.

Burberry fell as much as 7.2 per cent in London trading, the steepest drop since September 30. The trench-coat maker said it plans to spend a third of its £180 million (Dh1.06 billion) capital expenditure budget on larger stores this year, including in London, Chicago and Hong Kong.

Average retail space will increase by 12 per cent to 14 per cent, it said.

The margin forecast was "the major surprise", Simon Irwin, an analyst at Liberum Capital in London, wrote in a note to clients. "Presumably the company is taking a cautious approach to the sales ramp up," particularly in more expensive western markets, said Irwin, who recommends buying shares.

Burberry fell 2.5 per cent to 1,352 pence as of 11.13am in London, trimming the stock's gain this year to 14 per cent.

Adjusted pre-tax profit in the 12 months ended March 31 rose to £376.2 million, Burberry said. The average estimate of 13 analysts surveyed by Bloomberg was £375.6 million.

Mainline stores

Europe's debt crisis and slowing economic growth in China have so far failed to dent demand for high-end goods. LVMH Moet Hennessy Louis Vuitton, the world's largest maker of luxury products, said last month that sales were accelerating.

Burberry said it will open 15 so-called mainline stores, net of closures, this year, mainly in emerging markets and cities with high tourist inflows.

The increase in average retail space will boost sales 8 per cent to 9 per cent, Chief Financial Officer Stacey Cartwright said at a presentation in London. The lower sales density per square foot in the larger stores won't hurt margins, Cartwright added.

"We will continue to invest in front-end opportunities within our brand, digital and retail strategies," Chief Executive Officer Angela Ahrendts said in the statement, adding the company is "vigilant about the external environment."

Licensing revenue

The company predicted underlying wholesale revenue will rise by a mid-single-digit percentage in the first half of the new fiscal year, even as it continues closing some accounts in Europe. The US Growth of at least 10 per cent is expected at key US department-store outlets, emerging-market franchise partners and travel retail stores in Asia, Burberry said.

Licensing revenue will be broadly unchanged in the year ahead, with double-digit percentage underlying growth at global product licenses offset by the planned termination and reduction of Japanese non-apparel licenses, Burberry said.

Talks continue with Interparfums regarding the establishment of a new operating model for the Burberry fragrance and beauty business, the company added yesterday.