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Burberry First-Half Profits Slip

Burberry Group profits declined 2.7 percent in the first half to $96.7 million, mainly due to costs from its Project Atlas information technology overhaul.

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LONDON — Burberry is moving in new directions and feeling the growing pains.

Burberry Group plc saw net profits decline 2.7 percent in the first half ended Sept. 30 to 53.1 million pounds, or $96.7 million, from 54.6 million pounds, or $99.1 million, due chiefly to extraordinary costs from its long-awaited Project Atlas information technology overhaul.

Turnover in the period rose 2.1 percent to 354.9 million pounds, or $646.7 million, from 347.5 million pounds, or $630.4 million, due in large part to ongoing retail expansion, the company said in a statement Tuesday. All figures have been calculated at average exchange rates for the respective periods.

In a separate announcement, Burberry said Brian Blake, group president and chief operating officer, has resigned for family reasons. The announcement confirms a WWD report last month. Blake will remain in his post until the end of the year, and will not be immediately replaced.

In the results statement Tuesday, outgoing Burberry chief executive Rose Marie Bravo said she remains optimistic about the future.

"In the context of a period marked by strategic investment and transition, Burberry delivered a solid performance in the first half. With cold weather arriving and the holidays approaching, we enter our most important time of the year with cautious optimism," she said in a statement.

Cautious is the key word for the second half: The statement said Burberry is expecting a "moderate, underlying decline" in wholesale sales, which currently account for just more than 50 percent of turnover.

The expected wholesale sales drop is due to a variety of factors: Burberry is adding more of its own retail stores in the U.S. and therefore readjusting the wholesale-retail channel mix in that market. In Spain, Burberry will be converting chunks of its women's wear business from wholesale to a retail concession format in the fourth quarter. As a result, the company said it's expecting soft demand in Spain.

The company said a similar decline in sales and profits will take place in Taiwan, where Burberry recently has acquired its distributors. The acquisition involves 12 retail locations.

"We are a business in transition on so many fronts," Stacey Cartwright, the company's chief financial officer, told WWD. "From the arrival of a new chief executive to Project Atlas to our new retail openings to the new Luxottica eyewear license, we're undergoing a series of short-term changes that will bring big benefits in the long term."

J.P. Morgan said in its research report Tuesday that Burberry's overall results were better than expected, while Morgan Stanley said there were "no surprises" in Tuesday's figures.

With regard to retail in the second half, Burberry said its store-opening program is on track. Average retail selling space is expected to increase by approximately 10 percent in the second half, and a total of 9 percent for the full year, excluding the effect of the newly acquired Taiwan stores.

Average selling space increased by approximately 8 percent in the first half.

Licensing revenue in the second half will remain broadly flat against the first half. As reported, the company is re-structuring its business in Japan. Burberry is trying to enhance its brand positioning, which is restraining volume growth.

Burberry's transition to new eyewear licensee Luxottica also will have an impact on revenue growth in the second half, as the new line won't be in stores until fall 2006.

Operating profit in the first half declined 2.3 percent to 75.8 million pounds, or $138.1 million, from 77.6 million pounds, or $140.8 million, due to 3 million pounds, or $5.5 million, in costs from the Project Atlas program.

Stripping out those costs, operating profit would have risen 1.5 percent to 78.8 million pounds, or $143.6 million.

In May, Burberry announced Project Atlas, a major infrastructure initiative aimed at revamping its wholesale, retail and finance systems. It will impact sectors of the business including supply chain, shipping, merchandising and support services.

Burberry expects to invest approximately $91.5 million over three years in Project Atlas. It plans to reap annual benefits of $36.6 million by year three, and that figure is expected to grow by years four and five.

As reported, first-half retail sales showed the highest growth rate, rising 11.7 percent to 124 million pounds, or $225.9 million, from 111 million pounds, or $201.4 million.

Wholesale sales dipped 3 percent to 191 million pounds, or $348 million, from 197 million pounds, or $357.4 million, and licensing revenue rose 2.6 percent in the period to 40 million pounds, or $72.9 million, from 39 million pounds, or $70.7 million.

In the first half, fragrance-related royalty growth slowed, reflecting strong comparatives resulting from the Burberry Brit for men launch in the previous year and the one-year anniversary of Burberry's royalty rate increase.

On an accessories note, Cartwright said the company was "hugely excited" by its new recruit, Laura Hall, who joined Burberry this month as senior vice president, accessories and shoes. She will focus on the product development, production and merchandising of the Burberry London accessories and shoe collections worldwide.

Hall replaces Pamela Harper, who now works with Cartwright on Project Atlas. She was formerly vice president, global merchandise manager-fashion, at DFS Group Ltd.

With regard to Blake's departure, Cartwright said his leaving would dovetail with the arrival of Angela Ahrendts, who will replace Bravo as ceo.

"We totally understand Brian's reasons for leaving, and the family issues he has to resolve," said Cartwright. Asked about his replacement, she said: "We're not going to rush into anything. Angela needs to settle in, and take her time to see what the company's needs are."