By Helen Reid and Mimosa Spencer

LONDON/PARIS (Reuters) - Burberry's 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 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 at half-year results on Nov 14.

Some investors and analysts say Burberry's 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 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 classic trench coats, check pattern scarves and bags at steep discounts.

"Burberry 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 is aiming for the higher end, which would also mean a higher share price valuation, analysts say.

"If Burberry 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 is a little bit in the middle right now."

CREATIVE DIRECTION

While Burberry 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.