Shares in Burberry fell by 2.9 per cent in early trading despite the upmarket clothing retailer beating market expectations with a 12 per cent increase in operating profits as sales rose 14 per cent to £850.3 million.

Operating profits rose from £165.6 million to £185.1 million in the 12 months to March 31, 2007, ahead of market forecasts of £180 million. Burberry will pay a final dividend of 7.6p per share, resulting in a 10.5p per share payout for the year, up 31 per cent on the previous 12 months.

However, the City was spooked by a dip in pre-tax profits from £157 million to £156.3 million, as Burberry revealed that revenues from licensing its designs to Japanese manufacturers would continue to be affected by the weak yen and the termination of agreements with some partners.

Also, sales from its wholesale operation, where it sells its goods to large stores, rose by just 3 per cent, from £343.3 million to £354.1 million.

Overall, annual licensing sales rose by 6 per cent to £86.1 million, contributing 10 per cent to overall turnover compared with 11 per cent in the previous year. Burberry's Japanese licensing agreements account for 64 per cent of the division's revenue.

Burberry said that it expects underlying turnover from licensing to be "broadly flat" in the current financial year, although yen-related exchange movements will reduce revenues by £6 million.

The company is attempting to change the range of products its partners produce for the Japanese market, including selling handbags that are manufactured in Europe. Japanese shoppers believe that accessories made in areas such as Italy carry extra cache.

Burberry's strongest area of growth in its last financial year was retail, where sale rose by 29 per cent, from £318.5 million to £410.1 million, with women's rainwear a particular highlight.

The company also disclosed today that it spent £6.5 million on closing down its factory based in Treorchy in Wales, which shut its doors in March. Burberry also invested nearly £22 million in upgrading its back-office functions as part of its Project Atlas programme, which has included installing a new computer system.

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