UPDATE 2-Burberry beats sales forecasts, warns of forex hit

Thu Jul 10, 2014 5:44am EDT

* 12 pct sales growth compares to 8 pct forecast

* Strength of British pound to hit full-year profit

* Says demand from Chinese travellers remains strong (Recasts, adds analyst comments, detail, share price)

By Astrid Wendlandt

PARIS, July 10 (Reuters) - British luxury brand Burberry reported faster than expected sales growth in its financial first quarter but warned a strong pound would hit this year's profits.

Burberry reported retail revenue of 370 million pounds ($629.6 million) for the three months to June 30, which beat analyst forecasts of around 350 million pounds. Sales growth reached 12 percent on a like-for-like basis, compared to an 8 percent consensus analyst forecast.

Bigger luxury labels such as Louis Vuitton and Gucci have seen retail sales growth collapse to below 5 percent from above 10 percent three years ago as consumers tired of global brands they saw as too ubiquitous.

Burberry, known for its camel trenchcoats, has kept sales growing in China, unlike rivals that suffered more from a crackdown on corruption and conspicuous spending.

But sterling's strength is taking its toll on the company's earnings power.

Burberry's fixed costs are in pounds and its revenue comes in a variety of currencies. It said exchange rates would reduce this year's retail and wholesale profit by about 55 million pounds and would narrow its adjusted operating margin to around 16 percent from 17.5 percent.

"Despite driving best-in-class top-line growth, the continued margin pressure at Burberry remains a concern, and today's results do not help to improve the profitability gap that exists between Burberry and its luxury peers," Bernstein said in a note.

It estimated the operating profitability gap between Burberry and top players such as Kering, the group behind Gucci, and Prada to be around 7-10 percent.

Morgan Stanley said it expected consensus expectations for profit before tax to be cut by around 3-4 percent.

Burberry shares still rose 2.2 percent on Thursday.

"We believe that investors will likely welcome first thing this morning the very strong like-for-like (sales growth) reported by Burberry, confirming the very solid underlying momentum the brand has been enjoying for the last few quarters," said JP Morgan, which has a "neutral" rating on Burberry shares.

CHINESE TRAVELLERS

Burberry is the first luxury goods company to report second quarter earnings, to be followed later this month by Louis Vuitton owner LVMH and Kering.

The British brand said demand in the UK remained solid but noted a slowdown in continental Europe, with a decline in the number of transactions from tourists including Russians, a trend that is likely to have affected rivals as well.

However, demand from Chinese travellers remained strong, it said.

"Burberry remains one of the very few luxury companies to continue to enjoy double-digit revenue growth," Citi said in note. Citi has a "neutral" rating on the stock as it believes a valuation premium to peers has disappeared in the past year.

Burberry started running its perfume business directly last year after ending a partnership with Interparfums. It said it expected to roll out its first skin care products "at some point in 2015".

The brand, which has branched out into make-up and nail polish, said it expected beauty revenue to rise 25 percent this year.

It said it expected broadly unchanged revenue at constant exchange rates in both Japan and global product licences, but it would lose about 10 million pounds in reported licensing revenue, given the movement in the sterling/yen rate. ($1 = 0.5877 British Pounds) (Editing by Tom Pfeiffer)

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