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UPDATE 3-Burberry hit by weak department stores despite sterling boost
October 18, 2016 / 7:01 AM / a year ago

UPDATE 3-Burberry hit by weak department stores despite sterling boost

* UK sales rise 30 percent in Q2 for luxury group

* Tourists and UK consumers spend strongly after Brexit vote

* But group H1 sales fall on weak wholesale trends

* Shares fall 9 percent, retreating from 14-month highs (Adds further CFO comments, updates shares)

By Paul Sandle

LONDON, Oct 18 (Reuters) - British luxury fashion brand Burberry reported a drop in first-half sales on Tuesday, hitting its shares as weak demand from U.S. department stores offset a surge in sales in its home market as tourists took advantage of a lower pound.

The stock, one of the best performers since Britain voted to leave the European Union on June 23 in anticipation the company would benefit from a slide in the pound, dropped as much as 9 percent, its biggest one day fall for four years.

Burberry, which makes more than 80 percent of its sales abroad, said a 30 percent jump in UK sales helped it generate a 2 percent rise in comparable retail sales in the second quarter, its first growth in that measure for four quarters.

But total sales fell 4 percent on an underlying basis to 1.16 billion pounds ($1.44 billion) in the six months ended September, as its stores performance was dampened by a fall in wholesale and licensing revenues.

“Foreign exchange benefits aside, Burberry struggles to drive meaningful growth,” broker Liberum said, adding it expected no improvement in the second half as U.S. department store demand remained depressed. It has a “sell” rating on Burberry stock.

The shares hit a 14-month high on Friday, partly in anticipation of a currency-related lift to sales and profit.

Burberry said if sterling remained at the level of Oct. 12, adjusted annual profit would be boosted by some 125 million pounds.

Citi analysts said the tailwind from the weaker pound, albeit it broadly in line with its expectations, provided “welcome breathing room in a difficult year”. They are “neutral” on the stock.

LONDON SHOPPERS

Chief Financial Officer Carol Fairweather said there had been strong demand from both consumers and tourists in Britain since the Brexit vote for products including a bridle bag that was available to buy immediately after it appeared on the runway in September.

“The Chinese are very much part of that, but all tourists are up in this quarter, the U.S. as well,” she said.

“(They are) clearly influenced by foreign exchange rates movements but they are also really responding to everything they are seeing in the stores.”

Britain, where the trench-coat maker incurs about 40 percent of its costs, accounted for about 15 percent of sales in the half year, she said, up from about 10 percent previously.

But markets further afield continued to struggle, particularly Hong Kong, which saw double-digit falls, and the United States, where department stores were having a “difficult time,” Fairweather said.

Burberry said wholesale revenue fell by a mid-teens percentage in the half year, and it expected little or no improvement in the rest of the year.

The company, which added actress Lily James to its list of models in the summer, has been working to improve its stores, where sales margins have lagged luxury industry rivals.

Christopher Bailey, who will relinquish the chief executive half of his role to Marco Gobbetti from French brand Celine next year, said the group was making progress in its self-improvement plan in a retail environment that remained “challenging”.

“We remain on track to deliver our financial goals,” said Bailey, who will remain chief creative officer and become company president.

At 1144 GMT, Burberry shares were down 7.1 percent at 1,405 pence, handing back almost all of the gains made in the last two weeks.

$1 = 0.8042 pounds Editing by Kate Holton and Mark Potter

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