Esprit shares fall sharply in Hong Kong after broker downgrades

PUBLISHED : Thursday, 09 May, 2013, 12:00am
UPDATED : Thursday, 09 May, 2013, 4:39am

Shares of fashion retailer Esprit, which warned of a substantial loss for the year to June, dropped yesterday after brokers downgraded the stock.

The shares fell as much as 7.3 per cent in the morning before closing at HK$10.38, down 4.8 per cent on a day when the Hang Seng Index rose 0.86 per cent.

The Europe-focused clothier said in a filing on Monday night that revenue in the three months to March declined 7.9 per cent to HK$6.72 billion.

It said it expected to post a "substantial loss" this financial year because of a larger-than-expected operating loss and an estimated HK$2.76 billion of provisions and impairments, mainly related to mainland operations.

"The sales trends continue to be negative across the board" and there was "only a slight glimmer", said Karim Salamatian, a Credit Suisse analyst.

Credit Suisse has an "underperform" rating on the company and expects it to post a net loss of up to HK$3.4 billion for this financial year.

Aaron Fischer, an analyst at CLSA, was more even bearish about the retailer's future, saying there was "no light at the end of the tunnel".

"We reiterate our negative view on Esprit due to very low earnings visibility and prolonged sales recovery," Fischer said.

Esprit, which is struggling to revive its brand amid a decline in its market share, is halfway through an HK$18 billion transformation plan.

Fischer said it would take years for the effort to bear fruit and that the execution risk was very high.

Other brokers, including JP Morgan, Nomura and Bank of Merrill Lynch, all cut their ratings or share price targets for the company, saying the provisions and impairments might affect future cash flows and the execution of the transformation plan.

UBS, however, maintained a "buy" rating for the company, with a HK$13.60 share price target.

"Both retail same-store sales and wholesale showed improvement in the third quarter of this financial year … We expect Esprit to be profitable in the financial year of 2014, thanks to cost controls, providing buffer to the restructuring efforts," it said.