By and  on October 17, 2008

LONDON — The London Stock Exchange crashed this week to a five-year low, and the research analysts at Deutsche Bank are predicting 2009 will be “the worst year on record” for the luxury sector, but Burberry Group plc chief executive Angela Ahrendts is still smiling.

The 48-year-old Ahrendts, who took over the helm of Burberry in July 2006, is thinking big — and far beyond the next 12 to 24 months.

“We could turn off everything right now, but we’re not going to,” said Ahrendts, shortly after releasing Burberry’s first-half trading statement, which revealed a 20 percent spike in turnover. “This is the sort of time when leaders are born and made, and we will micromanage this business to stay on top. We are absolutely going to stay the course.”

Ahrendts, speaking from her bright, white office at Burberry’s Haymarket headquarters here, has reason to be positive. A report by Citi earlier this week said, “Burberry’s sales momentum and inventory levels might deteriorate in the Christmas period, but it should continue to outperform the luxury sector’s average revenue and earnings growth” in 2008 and 2009.

In the first six months to Sept. 30, Burberry’s sales rose to 539 million pounds, or $1.04 billion, from 449 million pounds, or $899.5 million, the previous year. All figures have been converted at average exchange rates for the respective periods.

Despite the double-digit results, the company is bracing itself for a challenging third quarter. Ahrendts said she expects trading conditions to remain “volatile and uncertain” for the crucial third quarter, the run-up to the Christmas season. In addition, the company said wholesale revenues are expected to be broadly flat on an underlying basis in the second half, with licensing revenues in the full year slightly down.

In a research note released Thursday, Deutsche Bank analyst Francesca Di Pasquantonio said 2009 “will prove to be the worst year on record for the luxury sector.” The investment bank cut earnings per share forecasts by 17 percent for 2009 and 23 percent for 2010.

“Given the macro headwinds and a deteriorating wealth effect, we now assume a more severe slowdown in both mature and emerging markets than previously,” the note said. Deutsche Bank expects a 1 percent decline in organic sales next year and “little rebound” in 2010.

While others may tremble, Ahrendts believes it’s a golden moment to negotiate better real estate deals, push into emerging markets, test new products, sharpen Burberry’s approach to inventory and stock levels, and burnish the brand’s image worldwide.

The company’s most immediate efforts are in the U.S., Burberry’s best-performing region in the first half with sales growth of 23 percent. Starting Monday, Burberry creative director Christopher Bailey will be in America, boosting the brand.

He’ll mark the reopening of the Beverly Hills flagship, the first new-generation flagship in the American market, with a party co-hosted by Mario Testino. The next night, Bailey will cohost a preview party with Graydon Carter to celebrate the opening of the “Vanity Fair Portraits 1913-2008” exhibition. Later in the week, Bailey will be at Neiman Marcus for a Burberry Prorsum collection trunk show, and will travel to New York for the Fashion Group International Night of Stars awards, where he is one of the honorees.

Although Ahrendts and her team acknowledged earlier this week that, going forward, orders at U.S. department stores may not be as robust as in past seasons, she said the solution was to excite the consumer with trunk shows, mailers and, most importantly, innovative products, which have been driving sales worldwide.

“Our American customers are still buying: Maybe they are buying less each time they come into the store, and they may be buying more items than outfits, but overall trends are still very solid,” she said.

Outside the U.S., she acknowledges some emerging markets have been bumpy, but that will not stop the company from continuing to build inroads in those areas.

“When the Russian stock market shuts down, we sure felt it in our stores. When five typhoons hit Hong Kong, it was the same thing. There are a lot of unique market dynamics right now. In this environment, we need to focus on what we can control,” she said.

Next month, Ahrendts will travel to Mumbai, India, where Burberry opened a store in August. The brand plans to open a third store in Bangalore in January. The company meanwhile, has signed a deal for a second flagship in Beijing, has recently opened a store in Macau, and will open six stores in the Middle East. “Emerging markets are some of the fastest-growing — and the least volatile — for us,” said Ahrendts.

Spain, one of the company’s biggest markets, remains a challenge, however. In the first half, sales fell 20 percent, and there is no improvement expected for the second half. “The biggest issue there is the economy, but we are certainly not resting,” and waiting for it to recover, she said. “We’re evolving the product, the ads and working closely with El Corte Inglés,” said Ahrendts, referring to the department store chain, which is Burberry’s largest wholesale client in that market.

At a product level, Ahrendts said innovative merchandise — both in outerwear and in the Burberry check — were the twin drivers of growth. Items such as lightweight, packable trenchcoats and bags with the check pattern — embellished with metal stitching or armorlike plates — “excite Burberry employees and customers alike.”

The brand is also pushing into new product categories. Children’s wear has become a key growth area and Burberry is testing two stand-alone children’s wear stores, in Palo Alto, Calif., and White Plains, N.Y. In June, it opened a stand-alone children’s store in Hong Kong. Ahrendts said the company took advantage of real estate opportunities in those states to set up the tester stores. “These kinds of opportunities are happening all over the world right now — there are some amazing deals to be had,” she said.

Burberry is also trialing new product categories: It has introduced a small selection of luggage and unveiled Burberry Body, a collection of daywear, sleepwear and intimates. Earlier this year, the firm launched a denim collection, with four washes and four fits as a component to the Burberry Sport collection.

The ceo said 2009 would be a year of consolidation for the launches, and that in 2010 the company would be ready to move into “other sectors where our peers play.” Ahrendts declined to be more specific.

One of the biggest areas Burberry has been focusing on is supply chain. Project Atlas, the company’s IT and supply chain overhaul program, is nearly finished and delivered 20 million pounds, or $35 million at current exchange, to the company’s bottom line in the 2007/08 fiscal year.

The company was able to deliver its fall 2008 collection six weeks earlier than the previous year, is now shipping by sea rather than by air, a cost-saving measure, and is relying on hubs in Hong Kong and the U.S. to replenish stock quicker in those markets.

The new system, she said, is giving the business complete transparency: Burberry can now trace its products from the development stage to the moment they hit the shop floor. “Never before have we been able to look at the business so closely,” she said, adding the company was working toward a “leaner, meaner, tighter business model.”

The next step, Ahrendts said, is getting “the science” of the business right, with regional and product planners who will work alongside Burberry’s retail stores and wholesale customers to hammer out stock levels. “We need to make sure that everything that is in the campaign is in the store and that we are never, ever out of products like the Haymarket Regent Tote,” she said, referring to one of Burberry’s all-time bestsellers.

Ahrendts admits this is the toughest economic climate she’s faced during her 30 years in retail. “But it’s also one of the most amazing and exciting phases of my career. Right now, I’m as positive as I can be.”

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