Esprit reports HK$95 million gain but warns of an 'uncertain' second half

Clothing retailer reports HK$95 million gain but warns of an 'uncertain' outlook for second half

PUBLISHED : Saturday, 22 February, 2014, 1:15am
UPDATED : Saturday, 22 February, 2014, 1:15am

Cost cuts of more than HK$1 billion may have put Esprit back in the black for its fiscal first half, rebounding from a heavy loss the year before, but the clothing retailer is "uncertain" whether it will stay profitable for the year's second half.

The brand reported a slim HK$95 million net profit for the six months to December compared with a HK$4.65 billion loss a year earlier. Investors were also rewarded with an interim dividend, which, at three HK cents a share, is the first payout since the 2012 financial year.

But profits will be difficult to maintain as the spring-summer season - when consumers buy less clothing - is a weaker time for the industry.

"The size of the business is always much smaller," chief executive Jose Manuel Martinez-Gutierrez said. "We don't think that the business will be much worse or better than last year, but it is more difficult to turn a profit. The rent you pay in the spring is the same as in the autumn but the sales are much lower."

Martinez said the results showed the company had stabilised and was on track in its revamp plan. Although "not a happy moment for the management [it was] not a worried one either", he said in describing the point Esprit has reached in its turnaround drive. Martinez admitted that until the company secured a HK$5.2 billion rights issue in November, "it was a shaky moment".

He said Esprit's original transformation plan outlined in 2011 - before Martinez took the top job at the struggling brand - was too cash intensive. "We were buying too much inventory, refurbishing stores with no return on investment, doing too much advertising that was not producing that high a traffic," Martinez said, stressing the retailer will continue its push to cut operating costs.

Chief financial officer Thomas Tang Wing-yung said Esprit reported a net cash position of HK$5.3 billion, the highest since June 2010.

The Hong Kong-based retailer expects a slight decline in the top line as it continues to downsize both retail space and wholesale accounts, and a further dip in the gross profit margin as it improves product quality. Turnover for the first half declined 5.5 per cent to HK$12.8 billion in line with a reduction in net sales area of 13.9 per cent. Gross product margin fell 1.4 per cent.

Esprit, which describes itself as a brand with a casual California attitude, launched a trends division in September to identify its customers preferences. Related to that initiative, the firm cut prices at all its 74 Taiwanese stores by 15-20 per cent as part of an experiment that it is looking to extend to its other markets.

Although the mainland was the company's third worst-performing market, Martinez reiterated Esprit's commitment to it. "It's key to turn China into a big success. It's one of the strategic pillars for Esprit," he said.

Esprit shares rose 0.69 per cent to close at HK$14.68 yesterday, in line with the Hang Seng Index's 0.78 per cent gain.