LONDON — Is luxury headed into a hurricane or a rain shower?

This story first appeared in the September 12, 2012 issue of WWD. Subscribe Today.

Industry observers were speculating about what lays ahead for the industry, as Burberry warned on Tuesday that adjusted pre-tax profits for the full year would be “around the lower end” of market expectations.

Burberry’s stock price plummeted nearly 21 percent to 10.88 pounds, or $17.41, at the day’s close following an unscheduled announcement that second-quarter retail sales so far were up 6 percent — due entirely to new store openings.

It was the second time in less than three months that Burberry has reported a slowdown in growth. Sales in the three months to June 30 climbed 11.2 percent, compared with 16.1 percent increase in the previous quarter.

The news dragged down other fashion and luxury stocks, including Compagnie Financière Richemont, which sank 5.1 percent to 60.85 Swiss francs, or $64.34; Ferragamo, 5.1 percent to 17.19 euros, or $21.98; LVMH Moët Hennessy Louis Vuitton, 3.4 percent to 127.80 euros, or $163.40; Mulberry Group, 4.2 percent to 13.01 pounds or $20.81, and PPR, 2.1 percent to 125.25 euros, or $161.14. All dollar figures have been calculated at current exchange rates.

Luxury stocks were also in retreat in the U.S. Among the decliners were Tumi Holdings Inc., down 3.2 percent to $24.10; Ralph Lauren Corp., 2.6 percent to $156.22; Saks Inc., 2.1 percent to $11.20, and Coach Inc., 1.8 percent to $61.48.

“We’re not in 2008, and Burberry hasn’t hit a brick wall — what we’re seeing is the continuation of a slowdown,” said Kate Calvert, a retail analyst at Seymour Pierce in London. “The question is, how much further will it slow? Right now we have no visibility, we don’t know how prolonged it will be.”

Calvert said one cause for concern is that the Burberry figures are “bang up to date” compared with the sunnier second-quarter figures posted by Burberry’s competitors such as LVMH, PPR and Hermès over the summer. She thinks there may be more bad news ahead for the sector. “I’m not feeling like this is a brand-specific thing,” she said.

Citing “a more challenging external environment” for the sector, Burberry said same-store sales in the first 10 weeks to Sept. 8 were flat year-on-year, with a “deceleration” in recent weeks. Burberry reported no major regional bias, with the slowdown coming from all areas including Europe, Asia and the Americas.

Chief executive officer Angela Ahrendts said the growth had come against historically high comparatives. “Given this background, we are tightly managing discretionary costs and taking appropriate actions to protect short-term profitability, while continuing to execute on our proven five key strategies,” she added.

A source close to Burberry said none of the actions would be “brand damaging, nothing the consumer would notice. There is no change on strategy, and no diversion from the big plans.”

Instead, Burberry management has frozen head count, travel, cut marketing spend and deferred IT projects. “They’re also using the merchandise to work the stores harder,” the source said.

Later this week, Burberry is set to open officially its largest store yet, a 44,000-square-foot space on London’s Regent Street that showcases the brand’s full merchandise offer.

Analysts at Investec in London were cautious about making too many predictions about Burberry:

“We remain long-term fans of Burberry’s strategy and business model, but for now, given the lack of visibility on sales momentum, we raise our risk discount to 15 percent…and move [our recommendation] to ‘hold.’ We, and the market, will have to wait for more information on Oct. 11,” said Investec in a report on Tuesday.

Burberry will issue a first-half trading update for the six months to Sept. 30 on Oct. 11, and interim results on Nov. 7. The markets were expecting Burberry’s adjusted pretax profits to range from 407 million pounds, or $651.2 million, to 455 million pounds, or $728 million.

The Burberry source said the company is sticking with its first-half guidance of midsingle-digit underlying wholesale growth.  

Burberry isn’t the only luxury company to witness a slowdown: Last week, Richemont reported a 23 percent uptick in the five months to Aug. 31, boosted partly by the weakening euro. At constant rates, growth would have been 13 percent.

However, Johann Rupert, executive chairman and group ceo, was cautious about the figures, noting that the 13 percent rate “includes a declining month-on-month rate of growth,” and talked about “moderation in sales growth since May.”

In July, while PPR and LVMH reported strong second-quarter results, there was an undercurrent of slowing growth, in particular among many divisions at LVMH and at Gucci.

Growth at PPR’s luxury division was broadly flat on a comparable basis due chiefly to a slowdown at Gucci, where growth fell to 10 percent from 11.6 percent in the previous three-month period. PPR said the slowdown was due to a “rationalization” of the brand’s wholesale distribution channels, especially those in Italy.

Hermès is the only major luxury player that hasn’t experienced a whiff of difficulty. Last week, the French brand reported that sales rose 28 percent during the first six months. It upped its target for 2012 sales growth to 12 percent from 10 percent previously.

Thomas Mesmin, a luxury analyst at Credit Agricole Cheuvreux, said he wasn’t surprised by Burberry’s announcement on Tuesday. He said the industry as a whole has been too focused on the top line. “Between 2007 and 2012, many brands moved very fast from wholesale to retail models, incurring more fixed costs, which put profits at risk,” he said.

“I don’t think Burberry’s retail model is appropriate — I think the stores are too big,” he added. “This is a high-multiple sector, so every time you have concerns regarding top-line growth, the sector comes under pressure.”

Burberry’s ongoing strategy has been to shift to retail and to focus on large-format stores in flagship markets that benefit from a high net worth local population and the traveling luxury consumer. In the 2011-12 fiscal year, stores in the flagship markets generated about 60 percent of mainline revenue.

One analyst, who spoke on condition of anonymity, said Burberry was clearly looking to manage market expectations with Tuesday’s announcement. “It’s no secret that things are getting tougher for the luxury industry, but it’s difficult to know whether Burberry’s slowdown is brand specific or industry specific,” he said.