Burberry to focus on bags and basics to reverse decline

* Full-year pretax profit falls 10 pct in tough luxury market

* See profit this year falling again, towards bottom of forecasts

* Seeks 100 mln stg annual savings, to axe 15-20 pct of products

* Shares (Berlin: DI6.BE - news) down 2.8 pct (Adds CFO and CEO comments, shares)

By Paul Sandle

LONDON, May 18 (Reuters) - British luxury brand Burberry said it would shrink its product range and focus more on handbags, seeking to overhaul its business after its annual profit dropped in a tough market that shows no sign of improving this year.

Burberry, which has lost more than a third of its market value over the past 12 months, said it aimed to make at least 100 million pounds ($144 million) in annual savings by 2019.

As part of that drive, the 160-year-old brand - famous for its trench coats lined with checks - said it would axe 15-20 percent of it individual products over the coming year across multiple lines.

It (Other OTC: ITGL - news) said its designers would focus more on handbags, a higher-margin and faster-growing area than clothing, and one where it lags rivals like Louis Vuitton and Prada (HKSE: 1913-OL.HK - news) .

Christopher Bailey, who combines the roles of chief executive and chief designer, said he was "committed to making the changes needed" at Burberry. But he added: I am mindful we are embarking on this plan at a time when our industry is facing significant challenges."

Like its luxury competitors, Burberry has been hit by a sales slowdown in Hong Kong and mainland China, while flagship stores in European capitals have been deserted by many Chinese tourists after last year's attacks in Paris.

The British brand is also not as good as its rivals at retailing basics, Bailey said. Its sales per square foot of about 1,600 euros per year are around a third of market leader Louis Vuitton's and also significantly below Prada and Moncler , according to UBS (LSE: 0QNR.L - news) analysts.

Burberry said on Wednesday it would make its stores more productive by tailoring ranges for local customers, improving customer service, training staff to a higher level and changing layouts to highlight a simpler range of goods.

GLOBAL BRAND

The company is a brand famous across the world whose designs have been modelled by Kate Moss, Cara Delevingne and Eddie Redmayne. It unveiled its overhaul plan after reporting a 10 percent drop in adjusted pretax profit to 421 million pounds for the year to end-March - broadly in line with analyst forecasts.

It increased its full-year dividend by 5 percent to 37 pence, and said it would buy back up to 150 million pounds of shares, starting this year.

Burberry also gave a bleak outlook for the current financial year, saying it expected profit to come in towards the bottom of market forecasts, which it said ranged from 375-449 million pounds, and be more weighted to the second half than last year.

Shares in the company, which have fallen 37 percent in the last 12 months, were down 2.8 percent at 1,111 pence at 0817 GMT.

Chief Financial Officer Carol Drinkwater said trading in Hong Kong - which along with Macau analysts say accounts for about 8 percent of sales - was tough, but the group's stores there were still profitable, and all luxury brands were being hit. "Conditions remain extremely challenging," she said.

The United States, which accounts for about 22 percent, also remained subdued. "In the U.S (Other OTC: UBGXF - news) . we do see opportunities long term but clearly current trading is challenging," the CFO said.

The company said it would also make costs savings - towards the 100 million pound annual goal - by improving efficiency throughout the business, without going into detail.

It said the drive would cut the group's operating costs by about 10 percent excluding fixed rent and depreciation. Only around 20 million pounds of savings will come through in the current year, however.

($1 = 0.6936 pounds) (Editing by Kate Holton and Pravin Char)