Burberry hammered after warning on profits -UPDATE

Shares in British fashion house Burberry plunged in early trading after it warned profits this year would be at the lower end of expectations.

The stock fell almost 18% when markets opened as the firm said it was taking steps to cut costs and maintain short-term profitability.

Burberry, which has 196 retail stores, 207 concessions, 48 outlet shops and 58 franchise stores worldwide, said it expected profits for the year to the end of March 2013 to be at the lower end of market expectations.

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The designer added that trading conditions were becoming more challenging with like-for-like sales flat in the second quarter.

The company, which had been riding on the crest of a retail wave driven by it popularity in the Far East, said retail sales growth at constant exchange rates was 6% in the 10 weeks to 8 September.

Of this, new space contributed the whole 6%, while like-for-like store turnover was unchanged year-on-year, with sales slowing in recent weeks.

Chief Executive Angela Ahrendts, said the second quarter retail sales growth had slowed 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 said.

Even the economic powerhouse of China has been exhibiting worrying signs recently, with growth slowing more than expected.

China, where demand for luxury Western goods had been very strong, reported falling imports and lackluster growth in exports for August.

Imports fell 2.6% from a year earlier, while exports rose 2.7% in August from a year ago.

In July Burberry warned that it was seeing a slowdown in gift giving in China, including small leather goods, cashmere scarves, but also trench coats.

At the time the firm put this down to the once-in-a-decade political change at the top of the ruling Communist Party making consumers nervous about spending.

Whatever the cause, the slowdown in key Asian markets has helped take the sheen off a previously rampant Burberry.

The company reported a 24% jump in annual profits to £366m in its last financial year, while total revenues were also up 24% to £1.9bn.

Seymour Price downgrades to hold (from buy)

Commenting on todays profit-warning analysts at Seymour Price said: "The trend Burberry is talking about may seem at odds with the rest of the sector news of late but we note that this is current news up until 8th September and would not be surprised if other luxury players are seeing similar trends.

"The recent de-rating of the shares has already started to anticipate a slowdown and this slowdown is nothing like the brick wall the sector impacted in 2008 when the financial crisis hit. Indeed, Burberry is in a much stronger position brand and infrastructure wise to react to a slowdown given recent system investment so is unlikely to have the same stock issues.

"This news will obviously hit sentiment towards Burberry and the luxury sector and the shares are likely to underperform until there is better news on demand so we are cutting our recommendation to Hold (Buy since 3 December 2010). However, we still consider Burberry a strong long term growth story with significant geographical and product mix opportunities."