Burberry Group Plc (BRBY), the U.K.’s largest luxury-goods maker, said earnings at its nascent beauty business will be less than half its original forecast this fiscal year as it steps up marketing spending.
The division, which Burberry has controlled directly since April, will earn about 10 million pounds ($16 million), the London-based trenchcoat maker said today in a statement, down from an earlier projection of about 25 million pounds. Burberry also reported little-changed first-half earnings and revenue that topped 1 billion pounds for the first time.
Switching the beauty unit to direct control from a licensing agreement has more than doubled the group’s marketing spending, according to Burberry, which plans to introduce a new women’s fragrance in February. The company said it expects a “halo” effect from investment in beauty that will boost sales across the group, while forecasting that operating profit margins will probably show a “modest increase” this year.
“Expectations on beauty profits are coming back down to earth — after a very punchy year one guidance,” said Luca Solca, an analyst at Exane BNP Paribas in London. This is unlikely to change in the near future as “a lack of scale and the need to invest will likely weigh on the bottom line.”
Burberry rose as much as 3.5 percent in London trading and was up 1.6 percent at 1,485 pence at 11:44 a.m. in London.
The company last month named Christopher Bailey to succeed Angela Ahrendts as chief executive officer when she leaves for Apple Inc. (AAPL) in mid-2014. Bailey’s appointment comes as the luxury industry is polarizing, meaning he must decide whether to move Burberry upscale to challenge brands like Prada and Louis Vuitton, or target a wider audience with less expensive goods, according to analysts at Sanford C. Bernstein.
“There will be no radical change in strategy,” Bailey told investors in a webcast today. Existing senior executives will take on additional responsibilities’’ to “enable Christopher to lead the business into the next phase of growth,” Burberry said in the statement.
The company will seek to offset the reduced profit contribution from beauty with “other areas of the business,” Allegra Perry, an analyst at Cantor Fitzgerald, said in a note.
Burberry doesn’t expect analysts’ estimates for full-year profit to move significantly from a range of 455 million pounds to 509 million pounds, it said last month. The average is about 472 million pounds, the company said at the time.
Adjusted pretax profit for the six months ended Sept. 30 was 173.9 million pounds compared with 173.4 million pounds a year earlier, the company said, less than a month after forecasting that the earnings would be around last year’s level.