LONDON/PARIS (Reuters) - Burberry's ( BBRYF ) new CEO Joshua Schulman faces an uphill task to turn around the British luxury brand whose sales have declined sharply while its share price has dropped 40% this year, stoking speculation it could be a takeover target.

The luxury sector as a whole has been hit as high interest rates and inflation have increased consumer reluctance to spend, but Burberry ( BBRYF ) has underperformed its peers.

Its shares rallied on Monday, however, following a report Italy's Moncler was considering a bid. Both companies declined to comment.

Schulman, the company's fourth CEO in 10 years, previously held the top job at Coach and at Michael Kors, and is expected to set out a new strategy for Burberry ( BBRYF ) at half-year results on Nov 14.

Some investors and analysts say Burberry's ( BBRYF ) roughly 56 outlet stores should be top priority for Schulman as they could detract from attempts to push the brand to the higher end of the luxury space.

Burberry ( BBRYF ) uses outlet stores in China, Japan, the United Kingdom and the United States to clear excess stock, and sell previous-year collections of Burberry's ( BBRYF ) classic trench coats, check pattern scarves and bags at steep discounts.

"Burberry ( BBRYF ) has been trying to elevate the brand, but the outlet exposure jeopardised and compromised this strategy," said HSBC analyst Aurelie Husson-Dumoutier.

    "A trench coat from the 2019 collection is not that different to the 2024 collection, so if I can buy it at half the price, why wouldn't I?" she added.

Cutting its outlet exposure would be costly as the stores account for close to 30% of sales and 50% of profitability, according to HSBC estimates.

But it could be necessary if Burberry ( BBRYF ) is aiming for the higher end, which would also mean a higher share price valuation, analysts say.

"If Burberry ( BBRYF ) were to go down the premium brand route (like Coach), the price-to-earnings multiple the market applies to these brands can be half that of true luxury players," said Bank of America analyst Ashley Wallace.

"The complication is that Burberry ( BBRYF ) is a little bit in the middle right now."

CREATIVE DIRECTION

While Burberry ( BBRYF ) has had a series of CEOs in a decade, the brand has also seen three creative directors in the last seven years - from Christopher Bailey to Riccardo Tisci, and now Daniel Lee - each bringing different styles, logos and fonts that some say have confused the brand identity.

Lee, who joined the brand two years ago, made his name at Bottega Veneta with a series of top-selling "it" shoes and bags like the 3,140-pound ($4,071) "Jodie" that reimagined the Italian brand's trademark intrecciato woven leather and drew in Gen-Z shoppers.

Lee's designs for Burberry ( BBRYF ) have yet to find the same level of success and rumours have swirled about his future at the brand. Burberry ( BBRYF ) Chairman Gerry Murphy told analysts in July that they "should not assume any change in creative leadership".

Sasha Kachanova, consumer analyst at asset manager abrdn, said Burberry ( BBRYF ) is known more for apparel and less for leather goods, so delivering a viral bag or shoe might take longer.

    Tom Delic, portfolio manager at Momentum, which holds Burberry ( BBRYF ) shares, said he would like to see "a refocus on the core ranges Burberry ( BBRYF ) is known for".

He also questioned Burberry's ( BBRYF ) pricing, saying it had raised prices too fast and too hard, potentially alienating aspirational luxury shoppers, especially younger ones.

"It is a classic brand but the collection they have doesn't resonate much with the younger audience," said 26-year-old Kishica Arora, while shopping in the Burberry ( BBRYF ) outlet in Hackney, east London, which sold items such as the "Snip" quilted crossbody bag for 1,795 pounds ($2,327.40), half the list price of 3,590 pounds.

    She was finding "great deals" on discounted T-shirts and other basic items featuring Burberry's ( BBRYF ) classic plaid, but said she would not buy Burberry ( BBRYF ) at full price.

"I would rather go to Jacquemus, because that's a little more trendy," she said.

($1 = 0.7736 pounds)