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Burberry Sets Focus on Long-term Plans

The company on Wednesday reported a 27.5 percent decline in first-half profits due entirely to exceptional items linked with its expansion.

LONDON — Burberry has lifted the veil on plans for its new beauty division, and said overall capital expenditure for the year would remain unchanged despite an uncertain climate and unpredictable footfall worldwide.

The company on Wednesday reported a 27.5 percent decline in first-half profits to 85 million pounds, or $134.3 million, due entirely to exceptional items linked with its long-term expansion plans, in particular the termination of its fragrance license with Inter Parfums SA.

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“We are going to stay in our lane — steady wins the race,” said chief executive officer Angela Ahrendts during a news conference with chief financial officer Stacey Cartwright at the brand’s new Regent Street flagship in London on Wednesday.

Ahrendts confirmed the company’s planned capital expenditure of 180 million pounds to 200 million pounds, or $288 million to $320 million at current exchange, would continue to be funneled to 25 key, high-demographic cities worldwide.

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First-half profits were dented by a 73.8 million pound, or $118.1 million, charge related to the termination of its fragrance and beauty license. That represents about half of the 181 million euro, or $231.7 million, fee that Burberry has to pay Inter Parfums for terminating the license.

The balance will be amortized each year from April to December 2017, but Cartwright said the funds would be “more than recouped” by the new beauty division over the next five years, and beyond.

Burberry plans to take its beauty business in-house as of April 1.

Stripping out the exceptional items, Burberry’s adjusted profits before taxes climbed 7.3 percent to 173.4 million pounds, or $274 million, and beat analysts’ expectations of about 165 million pounds, or $260.7 million.

In the half, revenue rose 6.4 percent to 882.5 million pounds, or $1.39 billion. Figures have been calculated at average exchange rates for the periods to which they refer.

Burberry also revealed some details of the beauty business. It said the new business would have no impact on retail and wholesale revenue or operating profit in the current fiscal year.

It said 2013-14 would be a “transitional year,” with beauty revenue expected to reach about 140 million pounds, or $224 million, with around 25 million pounds, or $40 million, of incremental retail-wholesale operating profit, weighted toward the second half.

Ahrendts said Burberry has already begun to hire staff to run the division, including executives from fast-moving consumer goods groups such as Procter & Gamble.

She said Burberry would handle 100 percent of the creative side, and chief creative officer Christopher Bailey would remain in charge.

Ahrendts added the company was deciding whether to outsource or control in-house product development, technology, sourcing and supply chain. “It’s something we have to get our arms around,” she said. “We’ve got a lot to learn.”

She confirmed that Burberry would continue to work with its historic distribution partners throughout the world.

With regard to Burberry Beauty, the color cosmetics line the company launched in 2010, Ahrendts said it could make up 40 to 50 percent of the overall beauty business in the long-term.

Setting aside the dented profits, Burberry is forging ahead. Ahrendts admitted that unpredictable footfall was “broad-based” around the world, but that retail metrics remained strong, and middle-class Chinese were still traveling and shopping.

Cartwright said Burberry has already “stress-tested” its planned stores — assuming lower sales figures — and the company remains committed to its schedule of openings.

Ahrendts said men’s wear remains a golden opportunity: In the first half, it was the fastest-growing product division — up 12 percent underlying — and accounted for 25 percent of overall retail and wholesale revenue.

Men’s accessories generated 18 percent of nonapparel sales, with the fastest growth in Asia-Pacific on burberry.com.

“The men’s business throughout Asia is huge,” said Ahrendts, adding that Burberry could replicate the new stand-alone men’s store that it recently opened in Knightsbridge in the Asian markets.

She added that the brand’s “quasi-bespoke” offering, where customers can choose from a variety of styles and fabrics and have a bespoke suit made in a week’s time, has been “phenomenal worldwide.”

Not all of Burberry’s news is rosy: Quarterly revenue growth has been slowing, and the company said in September it was trying to keep a lid on costs.

Wednesday’s statement confirmed that marketing spend has been held flat as a percentage of sales in the first half, and expenses are being tightly controlled in areas such as head count, travel and discretionary business projects.

In the half, operating expenses increased by 11 percent, including a 15 million pound, or $23.7 million, reduction in performance-related payments to staff.