Store-cutting Esprit warns of more pain

Retailer's revenue for the nine months to March is estimated to be down 15.5 per cent, but chief executive is counting on a recovery next year

PUBLISHED : Wednesday, 15 May, 2013, 12:00am
UPDATED : Wednesday, 15 May, 2013, 4:01am

Esprit expects sales to continue to decline over the next financial year and a turnaround for the struggling fashion retailer is not likely until next year.

Chief executive Jose Manuel Martinez Gutierrez told investors yesterday that store closures would lead to a further slide in sales revenue in the next financial year to June.

He expects revenue to recover gradually from 2014 and the company may consider speeding up the expansion pace again after the business improves.

His statement came after the Europe-focused clothier found out it was to be removed from Hang Seng Index, effective from June 17. It will be replaced by Macau-based casino owner Galaxy Entertainment Group, Hang Seng Indexes Co said on Friday.

Esprit, which has lost market share to rivals such as Zara, H&M and Gap in recent years, forecast a "substantial" fiscal year loss last week because of store closures and loss of goodwill mainly related to mainland operations.

It said in a filing that revenue for the quarter to March declined nearly 8 per cent to HK$6.72 billion, and that of the nine months to March is estimated to be HK$20.3 billion, down 15.5 per cent year on year.

Nearly halfway through an HK$18 billion transformation plan, the company said it had been focusing on raising brand awareness, improving product design and streamlining the operation process.

Esprit said it would not save HK$1 billion a year by June 2015 as planned as its performance was not meeting expectations. The savings targets and other projections under the transformation plan were "no longer applicable", Gutierrez said.

Meanwhile, he said Esprit would slow down the pace of store openings on the mainland, which the company described as its growth engine two years ago. But the expansion would accelerate when sales reached a certain level, Gutierrez said in his presentation to investors in Ratingen, Germany.

Esprit set goals to achieve 8 to 10 per cent sales growth by the 2015 fiscal year, while sales on the mainland are expected to reach HK$6 billion annually. This was about four times the current level, he said.

"There's no surprise from the company," said Tanuj Shori, an executive director of Nomura Securities. "The company has rolled out its plan through 2014-15, rethinking the expansion pace and planning to get the products right before increasing stores in the China market. This is the right direction but will take a long time to see the effects."

CLSA analyst Mariana Kou said there were too many uncertainties around Esprit's efforts to revive the brand.

"Some people asked the management if it has achieved any milestones since the transformation was launched 11/2 years ago. But they said they didn't see any," Kou said.

Additional reporting by Bloomberg