Lightening the load as Esprit sinks lower into loss

PUBLISHED : Monday, 04 March, 2013, 12:00am
UPDATED : Monday, 04 March, 2013, 4:39am

If fashion brand Esprit was a sinking ship, its new chief executive would be the captain who tried to save it by jettisoning some of its cargo.

Apart from trimming costly marketing and advertising campaigns, the load may be lightened by ditching a design team tailor-made for the mainland market, a team whose effectiveness was questioned by the fashion group's new chief executive, Jose Manuel Martinez Gutierrez.

"[The team] hasn't proven yet that it provides better resources than our global collection … so we are re-assessing the need to have such a team," the Spanish chief told the South China Morning Post in his first media interview as the head of Esprit, which suffered a loss four times bigger than the worst market expectations for the six months to December.

The China design hub was one of the many ideas introduced by Esprit's former Dutch chief, Ronald Van der Vis, as part of his HK$18 billion transformation plan to reverse the fashion chain's falling profit and market share. But after the group missed analysts' earnings estimates five years in a row, he and the Esprit chairman resigned last September. Gutierrez, former senior executive of Zara's parent company Inditex took the helm one month later and says he is already fine-tuning the previous plans.

"Clearly the way we were spending and investing was not correlating with sales. That's why we ran out of cash, and we cannot continue making the same mistake," he said.

Esprit's net operating cash flow fell to just HK$730 million last year from HK$1.36 billion before Van der Vis joined the group in 2009. It now has to raise HK$5.2 billion in October by selling shares.

Of all its expenses, spending on marketing and advertising rose the quickest, with its proportion to turnover surging to 5.2 per cent last year from 1.86 per cent four years ago. Last year marketing and advertising expenses jumped 60.26 per cent year on year to HK$1.58 billion.

Market polls showed that mainland consumers' awareness of Esprit rose by 44 per cent last year. But same-store growth fell by 5.7 per cent during the first half of the group's fiscal year ending June this year, although the drop improved dramatically in the second quarter.

In light of slack traffic in their stores, Gutierrez also stalled a robust expansion plan by Van der Vis, which would have seen mainland sales points almost double to 1,900 by 2015.

"If you don't have the right product, whatever you do with marketing and opening of new stores may help a little, but you cannot turn the situation around." Gutierrez said he would elaborate on a new set of financial guidelines for the transformation plan in May.

Analysts said cost-cutting would be the right direction for the group to take as high wages, high expenses, and losses incurred by ageing inventory were weighing on performance despite the group's fairly optimal gross profit margin at 51 per cent.