Fashion chain Esprit heading for 'substantial' yearly loss

As red ink mounts, chain makes HK$2.76b of provisions over its mainland operations

PUBLISHED : Wednesday, 08 May, 2013, 12:00am
UPDATED : Wednesday, 08 May, 2013, 5:33am

Fashion retailer Esprit has warned it will make a substantial loss for the year to June, after larger-than-expected operating losses and the need to make HK$2.76 billion of provisions mostly related to its mainland operations.

Esprit, which competes against apparel makers such as Gap, Inditex's Zara and H&M, issued the profit warning yesterday in a filing to the Hong Kong stock exchange, based on unaudited management accounts for the nine months to March.

The group said it expected to record a substantial loss in the second half of the year to June and hence an overall substantial loss for the full year.

Esprit lost HK$465 million in the six months to December.

For the past financial year, it recorded attributable profit of HK$873 million.

The company said it anticipated a loss in the second half because of a number of "non-recurring provisions and impairments resulting from the fair values of the assets of the group, as well as a larger-than-expected operating loss".

The provisions include an impairment of goodwill arising from the acquisition of the remaining interests in associated companies on the mainland, estimated to be in the range of HK$1.8 billion to HK$2 billion.

In addition, the company said, it had closed 16 loss-making stores, which it estimated would hit its accounts for between HK$250 million and HK$300 million.

An additional HK$200 million to HK$220 million had been put aside to cover "onerous contracts" in the leases on 44 loss-making stores.

The chain is also writing down a further HK$220 million to HK$240 million to reflect more accurately the net realisable value of "aged" inventories.

These impairment charges, which together add up to HK$2.76 billion, were mainly non-cash items, Esprit said.

In the first quarter of this year, the company's turnover was HK$6.72 billion, down 7.9 per cent year on year.

For the nine months to March, turnover was HK$20.27 billion, down 15.5 per cent on the same period a year earlier.

Esprit's chief executive, Jose Manuel Martinez Gutierrez, who replaced his predecessor in September last year, said in February that he was fine-tuning an HK$18 billion restructuring plan introduced two years ago.