By  on May 21, 2013

LONDON Costs related to the termination of its fragrance and beauty license dented net profit at Burberry Group plc in what was otherwise a strong year, with revenues hitting 1.99 billion pounds, or $3.14 billion.

In the 12 months to March 31, net profit fell 3.4 percent to 254.3 million pounds, or $401.8 million, due to exceptional costs of 82.9 million pounds, or $131 million, linked to Burberry’s breakup with Inter Parfums and the creation of an in-house fragrance and beauty business.

Stripping out those exceptional items, the company’s adjusted pretax profit rose 13.7 percent to 427.8 million, or $675.9 million, beating analysts’ projections by 2 to 3 percent. Burberry’s shares closed up 5.3 percent on the London Stock Exchange at 15.41 pounds, or $23.42.

Revenue in the period climbed 7.6 percent due to robust sales growth in China and in categories such as men’s wear and children’s wear.

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The company increased its dividend 16 percent to 29 pence, or 44 cents at current exchange.

All figures have been converted from the pound at average exchange rates for the 12-month period.

During a conference call on Tuesday, chief executive officer Angela Ahrendts said revenue grew 20 percent in China, with a boost from 11 stores that opened during the period. There is more growth to come.

“China is still an underpenetrated market overall, and there is still a thirst for great brands with an engaging message,” she said, adding that traffic to Burberry’s Chinese site had grown 70 percent year-on-year.

Responding to questions about slowing demand in the region and a government crackdown on bribery, which has impacted the luxury goods market, she said, “There isn’t anything that scares us about China. All of the metrics are there: It is one of the fastest-growing countries in the world.”

Burberry has 69 stores in 35 cities in China and plans to open 25 mainline stores in the current year, biased toward China and Latin America. Capital expenditure in 2013-14 will climb nearly 14 percent to 200 million pounds, or $304 million.

Three large-format stores will open in Shanghai alone this year to serve the domestic Chinese tourist and the local shopper, Burberry has said.

Worldwide, Ahrendts said money will be invested in larger-format stores that stock the brand’s full offer, and that are “in tune with what customers are seeing online.” Smaller stores will be closed or relocated.

Ahrendts said men’s wear performed strongly in the period, with sales of men’s accessories growing by more than 30 percent, and generating nearly 20 percent of mainline retail accessories revenue.

She noted that large leather goods and soft ones — such as scarves and mufflers — performed strongly, and added that the men’s tailoring business was also on the rise, with potential for more growth.

Ahrendts added: “Looking ahead, although the macro environment remains uncertain, Burberry is well positioned with opportunity by channel, region and product. With the integration of beauty in April, we have added another exciting growth platform.”

Burberry confirmed it has completed the back-of-house integration of its beauty division.

“Burberry is now working with over 80 suppliers, has opened a new dedicated distribution center in France, and implemented SAP, its core IT infrastructure,” the company said, adding it has received nearly all the necessary regulatory approvals.

During the call, Ahrendts said it is still very early days for the beauty division: “We’re still not out of the woods, but so far, so good.” Asked about her top hires so far, she declined to give any names.

“We’re very fortunate to have lured top talent” from Burberry’s peers in categories ranging from supply chain to product design, she said, adding that the new fragrance Body Tender, launched in March, is performing strongly, and that it would benefit from “continued investment.”

Analysts were upbeat. “This is a solid set of results with a strong operational performance illustrating the group is executing well on its strategic objectives, with the brand well positioned for profitable growth, in our view,” said Cantor Research in London.

“Despite a strong performance, Burberry’s operating margin, 21.4 percent, remains well shy of key competitors such as PPR’s Gucci, at 31 percent, suggesting significant upside potential in our view,” Cantor added.

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