Esprit chief vows to cut costs after HK$4.39b loss

PUBLISHED : Tuesday, 10 September, 2013, 10:11am
UPDATED : Wednesday, 11 September, 2013, 4:45am

Esprit chief executive Jose Manuel Martinez said the clothing brand, which reported a loss of HK$4.39 billion yesterday for the year to June, would revitalise its supply-chain business model and continue to cut operating costs to turn itself around.

Although the loss exceeded analysts' consensus forecast of HK$3.4 billion, Martinez said he expected the retailer to return to a profit by next June.

It is important to understand that the problems with the company are quite structural. Our number one priority is product
Esprit chief executive Jose Manuel Martinez

The struggling firm, from which two senior executives resigned within 24 hours last year, fell short of its own recovery targets. Esprit had estimated it would achieve 8 per cent to 10 per cent sales growth, but sales declined 11.5 per cent year on year instead. It had forecast an operating profit margin of 15 per cent, but the figure came in at minus 16.1 per cent.

Martinez, a former executive at rival retailer Zara who joined Esprit almost a year ago, is injecting some of the Spanish firm's "fast fashion" methodology into the brand.

Esprit has been working to reduce lead time in its supply chain so that clothes hit stores within two to three months of manufacturing instead of six to nine months. It also scaled back its marketing and advertising costs by 30.7 per cent, and its staff costs by 3.4 per cent.

"It is important to understand that the problems with the company are quite structural," Martinez said. He said Esprit's strategy would centre on improving product desirability. "Our number one priority is product."

"Saving marketing spending is smart," said Aaron Fischer, CLSA's regional head of consumer research, but he felt that the estimated date of return to profitability was a tad ambitious.

Last year, Esprit used Gisele Bundchen, consistently ranked the highest-paid model in the world, in its advertising campaigns. However, that failed to improve sales.

"That was a waste of money, because they didn't have the products," Fischer said. "That led to increased customer traffic but not improved sales.

"You need the right products to convert traffic into sales. The key thing to focus on is improving the product, the fashion content. H&M and Zara do well by monitoring which items sell well in the stores, and communicate that to the head office with very short lead times. That kind of infrastructure is hard to build."