Burberry hit by U.S. slowdown ahead of executive reshuffle

By Kate Holton

LONDON (Reuters) - British luxury brand Burberry reported a slowdown in quarterly sales growth on Wednesday as tough trading in the United States checked recent gains driven by a weaker pound and showed the problems facing its new chief executive.

Shares in the fashion house, led by designer Christopher Bailey and known around the world for its classic trench coats, were down by 6 percent by 1220 GMT on Wednesday, having earlier been as much as 7.6 percent lower.

The stock had risen more than 50 percent after Britain voted last June to leave the European Union, triggering a plunge in the pound that has attracted tourists to London to buy luxury goods including the new DK88 handbag which costs up to 9,500 pounds ($12,210).

The statement highlighted a range of underlying issues for incoming Chief Executive Marco Gobbetti to address, including weak trading in the U.S., Hong Kong and South Korea.

Bailey will relinquish the CEO part of his role in July to Italian Gobbetti, previously at Celine. Bailey will retain the job of chief creative officer.

Group comparable sales rose by 2 percent in the three months to March 31, Burberry's fiscal fourth quarter. That was below analysts' average forecast of 4 percent, the previous quarter's 3 percent, and contrasted with a bullish update last week from LVMH, the world's biggest luxury group.

CHANGING TIMES

Exane BNP Paribas analyst Luca Solca said the group was hampered by the fact that bags and accessories were the fastest growing segment of the luxury market, where Burberry is smaller than rivals. The range makes up less than 30 percent of its business compared with peers who have 40-60 percent.

"In our view, Burberry needs new ideas to prompt stronger consumer interest," he said, forecasting a reduction in analysts' consensus profit forecast of 480 million pounds for the 2017-18 financial year.

The slowdown at Burberry comes as the 161-year-old group embarks on a managerial and operational restructuring designed to bring its sales performance up to the levels of rivals such as LVMH.

"In an uncertain environment, we continue to take action to strengthen the brand and reposition Burberry for growth," said Bailey.

It has announced plans to license its fragrances and cosmetics business to Coty in a deal that will give it access to the U.S. group's extensive distribution network. But in the short-term its beauty business was hit by other distributors de-stocking the brand.

Burberry is also making changes in the United States, where it reduced the number of days it put its goods on sale in a highly promotional market.

And for 2017-2018, the company made clear it sees challenges ahead, as currency moves - supportive in 2016-2017 - turn negative. It said it expected an adverse impact of 10 million pounds in 2017-2018 as financial hedges designed to protect the business from higher procurement costs start to wear off.

In a bid to improve productivity, it will not open new floorspace in 2018 but instead use its digital channel to drive shoppers into the store. Burberry said digital was now influencing around 70 percent of buying decisions in Burberry compared with an industry figure of about 63 percent.

In Britain, the group said it expected demand to remain strong, with a 90 percent rise in the number of Americans buying in Britain in the second half of the year.

The group also said it had seen strong demand from Chinese tourists in Britain and Europe and said shoppers in Asia had snapped up the new lightweight tropical gabardine trench coat.

"We still see a strong UK economy, so overall that's good," new Chief Financial Officer Julie Brown told reporters, adding demand was coming from locals as well as tourists.

"(But) there is a period of instability as we go through Brexit and I think that's a concern of any global business."

Burberry reiterated it expected to hit its target for 2016-2017 adjusted profit before tax, which analysts expect to come in around 430 million pounds. Results are due on May 18.

($1 = 0.7781 pounds)

(Reporting by Kate Holton; Editing by Mark Potter and Keith Weir)