Burberry Says Investments to Weigh on First-Half Margins

May 23 (Bloomberg) -- Jonathan De Mello, head of retail consultancy at CBRE Group Inc., talks about full-year results at Burberry Group Plc and Marks & Spencer Group Plc. He speaks with Mark Barton on Bloomberg Television's "Countdown." (Source: Bloomberg)

Burberry Group Plc (BRBY), the U.K.’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 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, London-based Burberry said today as it reported a 26 percent profit increase that met analysts’ estimates.

Burberry fell as much as 7.2 percent in London trading, the steepest drop since Sept. 30. The trench coat maker said it plans to spend a third of its 180 million-pound ($283 million) to 200 million-pound capital expenditure budget on larger stores this year, including in London, Chicago and Hong Kong. Average retail space will increase by 12 percent to 14 percent, 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 the shares.

Burberry fell 2.5 percent to 1,352 pence as of 11:13 a.m. in London, trimming the stock’s gain this year to 14 percent.

Photographer: Balint Porneczi/Bloomberg

A pedestrian passes a Burberry store, operated by Burberry Group Plc, in Paris, France. Close

A pedestrian passes a Burberry store, operated by Burberry Group Plc, in Paris, France.

Photographer: Balint Porneczi/Bloomberg

A pedestrian passes a Burberry store, operated by Burberry Group Plc, in Paris, France.

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

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 SA, (MC) 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 percent to 9 percent, 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 said.

“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 that the company is “vigilant about the external environment.”

Burberry is prepared to react should the need arise, Cartwright said.

Licensing Revenue

The company predicted that 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 and the U.S. Growth of at least 10 percent is expected at key U.S. 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 potential establishment of a new operating model for the Burberry fragrance and beauty business, the company also said today.

Burberry increased its annual dividend by 25 percent to 25 pence a share.

Net income rose to 263.3 million pounds from 208.4 million pounds, trailing the 273.7 million-pound average estimate.

To contact the reporter on this story: Andrew Roberts in Paris at aroberts36@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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