Burberry profit warning ahead of investments

BURBERRY GROUP, the UK’s largest luxury-goods company, says 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 toward the first six months of the year and the company still expects a “modest” improvement in the operating margin of its retail and wholesale businesses for the year, Burberry says.

It reported a 26 per cent profit increase yesterday that met analysts’ estimates.

The trenchcoat maker says it plans to spend a third of its £180 million-£200 million 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 says.

The margin forecast was “the major surprise”, Simon Irwin, an analyst at Liberum Capital in London, wrote in a note to clients. “Presumably,” he added, “the company is taking a cautious approach to the sales ramp up,” particularly in more expensive western markets.

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

Europe’s debt crisis and slowing 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 says it will open 15 mainline stores, net of closures, this year, mainly in emerging markets and cities with high tourist inflows. The increase in average retail space would 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 would not hurt margins, Ms Cartwright added.

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

Talks continue with Interparfums regarding the potential establishment of a new operating model for the Burberry fragrance and beauty business, the company also says. – (Bloomberg)