New Burberry CEO to entrench brand in luxury, shares dive on cost

* CEO sets out new exclusive strategy

* Investors take fright at costs, shares slump 10 percent

* Burberry to cut sales to non-luxury stores

* CEO says started search for new creative head (Adds CEO comments, analyst reaction, updates shares)

By Paul Sandle

LONDON, Nov 9 (Reuters) - British luxury brand Burberry will shift further up-market with more high-end products, fast-changing fashion and refurbished stores, but its shares dived as investors focused on the cost of new Chief (Taiwan OTC: 3345.TWO - news) Executive Marco Gobbetti's plan.

The company, which announced last week that Christopher Bailey, the designer who turned Burberry into a global label, would leave next year, said it would cut sales to non-luxury stores, initially in the United States, enhancing the brand's exclusivity.

The company, which still manufactures its trademark trench coats in northern England, will refresh ranges more often, constantly bringing out new designs to meet the expectations of young consumers, and will also focus on higher-margin handbags.

But shares in the group fell as much as 14 percent as the company outlined the cost of the transformation, including rationalising distribution and refurbishing its stores. They were trading down nearly 10 percent at 17.89 pounds by 1520 GMT.

Analysts at UBS said some "clean up" had been expected, but Gobbetti's strategy was longer and deeper than the market had expected.

Burberry said there would be little, if any, growth in revenue and operating profit until its 2021 financial year as it implements the plan.

Gobbetti, who took over as CEO from Bailey in July, said Burberry had been outpaced in recent years by French and Italian rivals in the luxury fashion segment of the market.

"We must sharpen our brand position, we must move up to plant ourselves firmly in luxury," he said on Thursday.

The company must "respond to customers who want fashion and newness," he said.

He said some products, like a simple polo shirt, needed to be priced about 50 percent higher to match other luxury players. Other products, like trench coats, which cost around 1,200 pounds ($1,570) were already at the right level.

"But don't expect a major price repositioning of the brand," said Gobbetti, who was recruited from French brand Celine.

"(But) by re-energising our product and customer experience to establish our position firmly in luxury, we will play in the most rewarding, enduring segment of the market."

Chief Financial Officer Julie Brown told reporters that total restructuring costs would increase to 110 million pounds ($144 million), from 60 million previously.

Capital expenditure would be 150-160 million pounds in the 2019 and 2020 financial years, building to 190-210 million pounds thereafter, the company said.

NEW DESIGNS

Gobbetti said he was saddened by the departure of Bailey, who was at the presentation at Burberry's London offices.

"It will take some time to find the right creative lead for Burberry for the next decade," he said. "Don't expect any announcements very, very soon."

British fashion designer Phoebe Philo, who is creative director at French house Celine, is the front runner.

Gobbetti wouldn't be drawn on any rumours, and wouldn't say if he wanted another British designer to creatively lead a label that has made much of its 161-year British heritage.

He unveiled the transformation alongside first-half results, which saw revenue rise by an underlying 4 percent to 1.26 billion pounds, with comparable sales also up a better-than-expected 4 percent.

Adjusted operating profit rose 17 percent to 185 million pounds, beating the market forecast of 167 million pounds.

Burberry, known for its camel, red and black check, has seen sales in China rebound, but not at the rate of some rivals.

The United States, where Burberry has been hurt by a tough market for department stores, has been a weak spot for the company, and sales declined slightly in the first half. ($1 = 0.7635 pounds) (Editing by Costas Pitas and Adrian Croft)