Market Calls

Esprit Holdings has had another disastrous week. It delivered its full-year results on Thursday, in which it revealed a 98 per cent drop in net profit year on year, triggering downgrades by UBS, JP Morgan, Citibank, Credit Suisse, MF Global and Deutsche Bank.

Gary Pinge (Macquarie) is sticking with an outperform rating on Esprit. He focuses his discussion on the resilience of the Esprit brand.

'The brand is not broken. The company shows a big improvement in China in its results; you cannot say the brand is broken,' says Pinge. 'The retail side had flat growth or marginally negative, but that is not what a broken brand displays. A broken brand would see sharply declining sales.'

The firm has announced a multiyear transformation plan that will see Esprit embark on a rebranding campaign with supermodel Gisele Bundchen as its spokeswoman. Esprit will also be revamping its shops, and Pinge expects to see a pay-off from the rebranding in six months or so.

Esprit says that the rebranding campaign will involve HK$18 billion in extra spending over the next four years, including HK$6.8 billion to be put aside for advertising and promotion alone.

Aaron Fischer (CLSA) does not look favourably on Esprit.

'We've been super-negative on the stock for 12 months,' says Fischer. 'The brand is in a tough position because it's lost appeal to key customers in most markets. In Germany, customers have been switching to retailers like H&M.'

The firm announced in June 2009 that it was bringing in a new chief executive, Ronald van der Vis, to help address its problems. But Fischer, who maintains a sell on Esprit at any price, is sceptical that the firm's rebranding campaign will be effective.

'The brand is in trouble, and turning around a mass-market brand is very challenging,' says Fischer.

Mohan Singh (MF Global) lowered his call to neutral after the results. His concern is that advertising and promotion costs will climb from 2.9 per cent of revenue to 6-8 per cent.

'Operating costs will go up and that will depress operating profit,' says Singh. 'The new management is taking the right steps, but profitability will be squeezed.'

The views stated here are those of analysts and are not stock calls by the South China Morning Post