Bags and accessories. Various photos of the new Burberry store on Bloor St West. This is the second store in Toronto with the other at Yorkdale Mall.Fred Lum/The Globe and Mail
Burberry is stepping up spending on new stores and upgrading existing ones to cash in on a boom in demand for luxury goods, it said on Thursday, as it met forecasts with a 39 per cent leap in full-year profit.
The maker of raincoats and handbags, best known for its camel, red and black check pattern, said the investment would limit growth in profit margins in the coming year, sparking a retreat in its shares after recent strong gains.
Chief Executive Angela Ahrendts said she was sure the spending would pay back in what she described as very strong recovery in demand for luxury goods, led by Chinese shoppers and tourists.
"It is time to get our retail footprint up to par with consumers' perception of the brand," she told reporters, adding Burberry had spent the last five years improving the "back end" of the business, like its supply chain and technology.
The 155-year-old group said it would invest £180-million to £200-million in 2011/12 ($290 to 325-million U.S.), up from £108-million in the year to end-March.
About half will go on new shops, including 20 in fast-growing emerging markets like Brazil, India and Mexico, with the rest spent on upgrading and expanding shops in flagship cities like Chicago, Milan, Hong Kong and Paris, as well as doubling selling space in the group's home city of London.
Burberry will spend £20-million extending its store in London's prestigious Knightsbridge district, as well as relocating and extending its store on major shopping thoroughfare Regent Street.
"This is our headquarters. We should shine here greater than anywhere in the world," Ms. Ahrendts said on a conference call.
Burberry said the investment would hit operating profit margins in the first half of this financial year and the full-year increase would be "modest" after three years of strong gains to a record high of 15.6 per cent in 2011/12.
That knocked back Burberry's high-flying shares, which have risen more than sevenfold over the past 2-1/2 years as the group has staged a stunning recovery from the global economic downturn and attracted speculation it could become a bid target as takeover deals hot up in the luxury sector.
Citi analysts said profit forecasts for 2011/12 might edge down from the current consensus of around 364 million pounds.
However, Nomura's Fraser Ramzan said the investment could spur growth, and underpin the shares longer term.
"Any volatility inspired by the company's decision to accelerate investment in its business could provide an interesting opportunity in the shares," he said.
Burberry Finance Director Stacey Cartwright said she did not expect any change to the 2011/12 consensus profit forecast.
The global luxury goods market has continued last year's strong recovery, defying fears it might be hit by austerity measures in Europe and steps to cool fast-growing emerging market economies.
Earlier this month U.S. consultancy Bain raised its 2011 growth forecast for global luxury sales to 8 per cent from 3-5 per cent, and executives were in bullish mood at Reuters luxury summit this week.
Burberry said profit before tax and one-off items jumped to £298-million in the year to March 31, in line with company guidance that was raised last month.
Revenues climbed 27 per cent to £1.5-billion, helped by strong sales of accessories like leather bags, as well as its Prorsum runway collection and its London wear-to-work range.
Demand was led by the Asia/Pacific region, which became the group's largest by sales in the second half.
Burberry ended the year with net cash of £298-million and said it would pay a full-year dividend of 20 pence a share, up 43 per cent on the year before.
Cartwright said the group had no plans to buy back shares and wanted to retain the flexibility to take advantage of opportunities that might come along, such as its deal last year to buy out its franchise partner in China.
Ms. Ahrendts said selling prices had risen due to the higher cost of commodities like cotton and leather, but the group was also offsetting the impact by becoming more efficient.
U.S. upscale group Polo Ralph Lauren warned on Wednesday higher costs would hit margins.