Mulberry shares plunge as UK discounts hit profits

* FY profit seen at 19 mln stg vs 27 mln stg f'cast

* Shares fall by over a quarter

* CEO to stick to growth strategy (Writes through, adds CEO comments)

By Neil Maidment

LONDON, Jan 29 (Reuters) - Shares in Mulberry plunged by over a quarter on Wednesday as the British luxury fashion company warned annual profit would be well below forecasts due to heavy Christmas discounting in the UK and weak demand in South Korea.

The warning is a blow to Mulberry boss Bruno Guillon, who has hiked prices to take its brand more upmarket from a traditional position of "affordable luxury", and embarked on a drive to increase the company's profile overseas, targeting affluent Asian shoppers with new stores in key tourist spots.

Those efforts were undone by fierce and early discounting by UK retailers ahead of Christmas, which meant Mulberry - whose sale began on Dec. 26 - lost out as shoppers chose much cheaper rivals such as Michael Kors (Frankfurt: MKO.F - news) and Coach (NYSE: COH - news) .

Retail analyst Nick Bubb said the transition from a UK success story into a global brand did not appear to be going well: "It's all gone a bit wrong for poor old Mulberry since the spring of 2012, just after Bruno Guillon joined as CEO from Hermes, when its share price was nearly 2500p and the market cap was getting on for 1.5 billion pounds ($2.49 billion)."

Guillon told Reuters profit for the year to March 31 was expected to be around 19 million pounds, almost 8 million below analyst forecasts. The warning sent Mulberry shares down some 26 percent, hitting their lowest since November 2010 and reducing its market cap by around 140 million pounds to 400 million.

Despite an unhappy Christmas, which was compounded by a significant cancellation of wholesale orders from over-stocked Korean retailers, the group is sticking to its growth strategy, Guillon said.

"The plan stays the same. The strategy's exactly the same," he said. "I think that all this is showing is that we still depend very much on the UK and it has a strong impact on us. We need to reduce the dependence and the only way to do that is to go and be more present outside the UK."

Goldman Sachs (NYSE: GS-PB - news) analysts, who downgraded Mulberry shares to "neutral" from "buy" on Dec. 20, said on Wednesday it would now take longer to realize the potential in the Mulberry brand.

This "is reflected in this statement by the continued revenue growth slowdown compounded by cost growth as the store opening program continues," they said in a note.

Total (NYSE: TOT - news) retail sales for the 17 weeks to Jan. 25 were down 3 percent on a year ago, the firm said, which included a 7 percent decline for the crucial eight weeks to Jan. 25. International sales rose 40 percent year on year.

Adding to a tough home market, Mulberry said cancellations in Korea meant full-year wholesale sales, worth 35 percent of group turnover, would be 10 percent down on a year ago.

That fall would wipe out retail sales growth over the year, the firm said, and when combined with the costs associated with its recent store opening programme, would mean full-year profits substantially below forecasts.

NO COMPROMISE

Under Guillon, Mulberry, which made around 65 percent of its sales in the UK in 2013, has focused on improving the quality of its products and committed to making half of its handbags in England as it seeks a higher-end position for the brand.

The company, which hired British celebrity model Cara Delevigne for its spring ad campaign, hopes more expensive ranges will help retain customers who previously upgraded to pricier brands, while a greater presence overseas will boost sales in regions like Asia and the United States, and in Europe as affluent tourists visit to buy luxury goods.

"I cannot tell you when the strategy will really pick up. I think it will, because I think that what we do is really consistent all over the business. What is very important is not to compromise in our strategy," Guillon said.

The group said in December that while 60 percent of its bags were still on sale for under 1,000 pounds, new offers priced at up to 1,500 pounds were increasingly popular. Its latest Bayswater and Alexa bags sell for up to 4,500 pounds.

The firm will open 15 stores in the year to March and expects to open another 10-17 in its new fiscal year, including a flagship store on Paris's Rue Saint-Honore, a tourist hub that attracts around 1.4 million Chinese shoppers annually.

It added that it was in the final phase for appointing a new creative director after Emma Hill quit in September, but declined to give a time frame for an announcement. ($1 = 0.6030 British pounds) (Editing by Kate Holton and Tom Pfeiffer)