Burberry bets on bags

WEST HOLLYWOOD, California (Reuters) - In an upmarket mall where movie stars shop, Burberry is testing a new kind of store that may help it weather a cooling economy and cuts to the budgets of the bankers who typically favour its conservative suits and coats.

Under U.S.-born Chief Executive Angela Ahrendts, the British luxury goods house, whose brand is experiencing its biggest revival since its trench coats clad British soldiers in World War One, has come to Hollywood to tap into celebrity-led lust for high-priced handbags.

And there's barely a trench coat or a flash of its signature check in sight.

Instead, the store -- named 'Icon' after Burberry's higher-end ranges -- is crammed with accessories. Rows of sunglasses flank the entrance from floor to ceiling and shelves fairly drip with shoes, scarves and handbags including this season's hit, the studded Knight bag retailing at $2,995. Perfumes, watches and jewellery crowd the till area.

Covering 2,600 square feet -- a quarter the size of Burberry's London Knightsbridge flagship store -- the compact format seeks to maximise the temptation, but cap the cost.

"It's cute," said Sarah Lukes, 37, browsing the Beverly Centre store before Christmas. "I didn't realise they made watches and so many shoes. I usually think about them for down jackets and trench coats."

On a visit that also took in nearby Louis Vuitton and Gucci, Lukes had homed in on a pair of Burberry's quilted golden ballet pumps costing $475 and the Knight bag that's been photographed on the arms of celebrities Cameron Diaz and Sienna Miller.

GOLD ALLIGATOR SKIN

For Burberry, there's nothing cute about the project. The Icon store -- one of five worldwide, of which four are in the United States -- is part of a bid to close the gap with rivals like LVMH Moet Hennessy Louis Vuitton whose flourishing trade in accessories has helped its shares to trade at a 15 percent premium to Burberry's own, based on 2009 forecast earnings.

Britain's biggest fashion house hopes that by expanding beyond its trench coat origins into costlier accessories it can reach buyers of $3,000-plus handbags and top-tier shoes, who may be relatively immune to economic hardship.

This spring Burberry, which made a third of its 450 million pounds ($882.5 million) of sales from accessories in the first half to the end of September, will sell a handbag called "Warrior" in golden alligator skin for 13,000 pounds ($25,490).

"The Icon store test and the expansion into accessories are welcome," said JP Morgan luxury goods analyst Melanie Flouquet, who last week upgraded her recommendation on Burberry stock to "overweight" from "neutral".

She argued a steep sell-off of Burberry shares in the past six months -- prompted by investor worries it was more exposed to a downturn than its more diversified rivals -- was overdone.

Investors have cut the value of Burberry's shares by nearly 30 percent in that period, deeper than the 12 percent fall for the DJ Stoxx personal and household goods index which includes European rivals like LVMH, Christian Dior and Richemont.

That weakness was driven by higher-than-expected information technology infrastructure costs and concern the small size of Burberry's premium business leaves it more exposed to a slowdown in middle-income spending.

Goldman Sachs luxury industry analyst Jacques-Franck Dossin added Burberry to his "conviction sell list" in December because North America provides around a quarter of sales, saying its customers were more sensitive to gyrations in the wider economy.

JP Morgan's Flouquet said the experience of the last slowdown in luxury spending in 2001 showed luxury handbag sales were not necessarily more heavily affected than clothing, and leasing smaller shops would always be better-value than taking on larger real estate in a similar area.

Gross profit margins for accessories also typically stand at 65 percent and above compared with 55 percent for clothing, according to Italian fashion industry association Altagamma.

Luxury handbag sales in Burberry's European and U.S. retail stores made up 50-60 percent of total handbag sales in the first half, up from less than 5 percent some 18 months ago.

EXCITED

Ahrendts, who joined Burberry two years ago from Liz Claiborne Inc. to continue a transformation from outerwear maker to luxury brand started by Rose Marie Bravo, said in November she was "excited" by early results from the Icon stores while stressing they were still a trial.

She told reporters at the time she would continue the test for another six months before "investing aggressively" to take the format to scale. That could extend to Burberry operating four different sizes of stores in affluent areas such as Boston, Austin, Tampa and West Hollywood where the U.S. Icon trials are taking place.

The fifth Icon trial store is in Europe, in Prague, a destination for the well-heeled international tourists who are core buyers of Burberry goods.

Design director Christopher Bailey, backstage in Milan at Burberry's autumn and winter menswear show at the weekend, was unfazed by talk of crimped consumer spending and said the accessories business was "going unbelievably well".

And he unveiled new lines, so next time Lukes stops by the Icon store in West Hollywood her husband will also have options.

"The business is on fire," Bailey said after he showed an expanded accessories collection for men, sending models down the runway wearing leather and woollen gloves and hats, and carrying voluminous buttery leather totes.

(Additional reporting by Jo Winterbottom in Milan; editing by Sara Ledwith)