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Burberry says wealthier customers keep spending

Burberry store on Toronto’s Bloor St West: ‘With the things we can control we feel very positive,’ CEO Angela Ahrendts says.

Fred Lum/The Globe and Mail

British fashion house Burberry said it is in strong shape heading into Christmas as wealthier shoppers continue to spend on its top-end ranges.

"We are as strong going into the third quarter than we've been in the seven years I've been with the company," chief executive officer Angela Ahrendts said. "With the things we can control we feel very positive."

The firm, best known for its raincoats lined with a distinctive camel, red and black check design, sent shock waves through the industry in September when it warned of a slowdown in China, which has been the driving force of a near three-year boom in demand for luxury goods.

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Burberry said on Wednesday that while some of its more "aspirational" consumers had been hit by the faltering global economy it had sold a higher proportion of goods from its top-end Prorsum and London lines to its wealthiest customers, boosting first half profit margins.

The 156-year old firm is following an industry-wide trend of buying back licences, in a deal to end its agreement with Interparfums, bringing fragrance and beauty in-house from April, 2013.

"The opportunity for us is not only huge in the existing category [fragrance and beauty] but it will be the positive effect it has back on the core business as well," Ms. Ahrendts said.

She hopes fragrance will create a "halo effect" on sales of other products through cross-marketing and being able to tempt new fragrance customers with higher priced products. Chief financial officer Stacey Cartwright said Burberry sees fragrance and beauty as a growth area where it lags peers, including LVMH .

"By bringing it in-house and treating it as part of the core we will be able to leverage this business much more significantly over the medium and longer term," Ms. Cartwright said.

Burberry will make a €181-million ($232-million) payment to Interparfums for ending the licence, £71-million ($113-million) of which is taken as an exceptional item in first-half accounts.

The group made a profit before tax and one off items of £173-million in the six months to Sept. 30, compared with analyst forecasts of £157- to £172-million, with a consensus of £167-million, according to a company poll, and £162-million last year.

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The fashion firm said it expects the fragrance move to be broadly neutral to underlying profit in 2013-14 and "very nicely" earnings accretive thereafter.

Shares in the firm, down more than 15 per cent in the last six months, were down 1.2 per cent at £12.37 at about midday, valuing the business at about £5.5-billion.

"The backdrop is tough, Christmas is crucial, and we see few near-term catalysts," Investec analyst Bethany Hocking said.

Last month Burberry said sales had steadied in the final weeks of its second quarter, calming investors rattled by the earlier profit warning. On Wednesday there was no change to its guidance for the second half.

Total first-half revenue was £883-million, up 8 per cent at constant exchange rates, with first-quarter growth of 11 per cent slowing to 5 per cent in the second.

The firm said its retail/wholesale adjusted operating margin was up by 60 basis points to 15.5 per cent.

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The group, which ended the half with net cash of £237-million, is paying an interim dividend of 8 pence, up 14 per cent.

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