U.S. News

Burberry Profit Rise Overshadowed by Computer Costs


British fashion house Burberry reported a 12% rise in annual underlying profit on Thursday on strong sales of its clothes and $2,200 handbags but the cost of a computer system roll out weighed on its shares.

Burberry, famous for its camel, red and black check fabric design, posted adjusted 2006/2007 earnings before interest and tax (EBIT) of 185.1 million pounds ($365.7 million), slightly below analysts' forecasts.

But its shares fell as much as 3.3% amid concerns about the cost of its Atlas sales support computer system and the impact on a weaker Japanese yen on licensing revenues.

Burberry booked 21.6 million pounds on Atlas costs last year, ahead of some analysts' forecasts of 15 million. It generates almost 80% of licensing revenues -- royalties for using its name on items like sunglasses -- in Japan.

In 2006/2007, brisk demand for its 150th anniversary handbags pushed accessories sales higher, with particular strong demand for "Patent Beaton" and "Manor" quilted leather bags costing 1,095 pounds and 895 pounds each and sported by celebrities such as Victoria Beckham and Liz Hurley.

Sales of its distinctive rainwear helped drive 19% growth in womenswear sales at the group, which began in 1856 and made its name equipping polar explorers.

Burberry said its focus on its own shops over its wholesale and licensing businesses had improved its gross margin -- a key measure of profitability -- by 130 basis points to 61.3%.

Group revenue rose 15% to 850.3 million pounds.

The firm plans a 13% expansion in average retail selling space, mainly in the United States and Europe.

Burberry shares were down 3.61% at 676.04 pence, with analysts expressing concern about its plans to speed up its ability to restock popular lines, as well as the impact of a weaker yen on licensing revenues. The Atlas computer system is used to help track inventory.

Licensing revenue rose 10%, led by fragrances and watches, but currency movements cut underlying sales by 4 percentage points.

"We have left our '08 EBIT unchanged but believe the top end of consensus could come down slightly," Citigroup said in a note.

Retail Focus

"We face the current year with confidence, given the strength of our brand and effectiveness of our strategies," Chief Executive Angela Ahrendts said in a statement, adding the firm was keeping to the trading outlook announced in April.

It said first-half wholesale sales were expected to show a mid-teens percentage gain, while licensing revenue is seen flat, mainly due to a weaker Japanese yen.

"The shift in channel mix from wholesale to retail has seen gross margin improvement," Seymour Pierce analyst Andrew Wade said.

"The steps being taken by management to increase back office efficiencies, improve brand cohesion, increase the number of markets ... are sensible and are delivering top line growth. However, following a strong run, the stock is on nearly 23 times earnings, high enough at this stage."

Burberry proposed a final dividend of 7.652 pence per share, making total dividend of 10.5p, up 31%.