Esprit Holdings (HK stock code 330) is a clothing retailer and wholesale distributor with its primary listing in Hong Kong and a secondary listing in London. It has retail space in more than 40 countries and it also controls the RED EARTH brand name, distributing its cosmetic products in the Asia-Pacific region.
Esprit recovery still years away: analysts
The fading fashion retailer's rights offering and revamp is expected to improve sales but the company faces a long road to revitalise its brand
Esprit Holdings, which is stepping up spending on its revamp plans, is expected to see an improvement in sales this year, but earnings recovery is still years away, analysts said.
The fashion retailer is seeking to raise about HK$5.2 billion in a rights offering to support the company's HK$18 billion transformation plan to revive the brand, according to a filing with the Hong Kong stock exchange on Monday night.
"This move seems to reflect the high level of risk around the execution of the transformation plan," said Aaron Fischer, head of consumer and gaming research at CLSA. "We do not think the market is appreciating the massive step in transformation costs that will eat into earnings and free cash flow for this year."
Fischer is expecting close to zero earnings for the company for the financial year to next June, although sales may improve thanks to better products and the relatively low comparison base last year. The earnings recovery, he said, will lag the sales recovery by at least two to three years.
Analyst Zhao Xiao, of China Merchants Securities, also said it would require a lot of patience to see the transformation bear fruit.
"The rights offer proves that Esprit is still committed to the transformation plan it launched 18 months ago," Zhao said.
"However, it may take longer than it had expected to make consumers believe again Esprit is an attractive brand and start to purchase the products."
Esprit, a rival of American clothing chain Gap and Spanish fashion brand Zara, last month said "it had lost its soul" as it admitted to neglecting the brand, which became less appealing. Sales declined sharply owing to the sluggish European market and stiff competition.
To restore the brand's leading position, the company launched a massive transformation plan to improve product quality and design, reduce production lead times, refurbish existing shops and hire new management.
Last month, Jose Manuel Martinez Gutierrez, a former senior executive of Inditex, the parent company of Zara, took over as chief executive after his predecessor and the chairman quit within 24 hours in June.
Meanwhile, it also opened several "new concept" stores in Hong Kong, Beijing, Shanghai and other European cities.
Esprit will allot one rights share for every two existing shares at a price of HK$8, representing a discount of 36 per cent to its closing price on Monday.
"The rights offer is very likely to drag the share price down to a level below HK$10 in the short term," Kenny Tang Sing-hing, general manager of AMTD Financial Planning, said.
He said hot money has been flowing into Hong Kong's market recently, and Esprit's lower share price would be attractive to institutional investors that are turning positive on the retailer.