• Wed
  • Jul 23, 2014
  • Updated: 11:32pm

Esprit plunges on profit warning

PUBLISHED : Saturday, 03 September, 2011, 12:00am
UPDATED : Saturday, 03 September, 2011, 12:00am

Esprit Holdings, the biggest Hong Kong-listed fashion retailer, yesterday saw its shares fall more than 10 per cent after warning of a 'significant' loss in net profit caused by one-off restructuring costs.

The share price of Esprit plunged by up to 10.11 per cent to close at a three-week low of HK$19.64, compared to a 1.81 per cent slide in the Hang Seng Index.

The company said in a filing on Thursday night that the net profit for the year to June would 'record a significant decrease due to the one-off restructuring costs'. But the turnover for the year is expected to remain similar to the level recorded in the previous period.

According to the filing, Esprit's board has approved a strategic plan to restructure its stores. But the company did not elaborate.

Analysts said the restructuring costs might be related to the disposal of loss-making businesses in the United States and Canada and closure of many stores with long-term leases in Europe and the US.

'As the European market remains sluggish, some marginally profitable [Esprit] shops on the continent have become less profitable, and the company may have to shut them down as well,' said Gabriel Chan, analyst at Credit Suisse.

'Despite the pain [brought on by the restructuring], it's a good sign that the management has recognised the problems in the operation and has started to work on them.'

Goldman Sachs downgraded its rating of Esprit to Neutral from Buy.

'We underestimated the length and severity of the company's restructuring efforts, as well as the macro slowdown affecting Europe,' Goldman's note said.

It said the company's sales recovery has been slower than expected and the profit margin was deteriorating because of cost inflation. Esprit has been making efforts to improve its branding image but it will take time to win new customers, it added.

The European market, which accounts for 80 per cent of Esprit's total revenue, has seen a decline in recent years. Sales revenue in Europe fell 11 per cent for the six months to December, dragging down the total turnover by 4.2 per cent to HK$17.7 billion for the period.

The blue-chip clothing retailer announced last year it will shift its business focus from Europe to China, which it said will become the growth engine for the company. Esprit plans to close 33 shops, mostly in Europe and the US.

Bloomberg reported last month that Esprit is considering a possible sale of its operation in the US and Canada as part of its efforts to focus more on the Asian market.

'It's really hard to say the worst is over,' said Chan. 'Cotton price and how the European shops perform will be the two key factors in the company's performance over the next few years.'

An analyst at UOB Kay Hian (Hong Kong), who declined to be named, said the company was slow with its mainland strategy.

'Like in other places, Esprit has to compete against rivals like H&M, Gap and Zara in China. So far, it has not shown any edge in pricing or marketing strategy,' he said.

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