Esprit is too dependent on growth in Europe and euro gains for its earnings
Esprit, French for liveliness of mind or spirit, has certainly cut a dash as the Hong Kong-listed fashion retailer again beat predictions with strong results. Even the most bullish of market forecasts appeared to be surpassed and the share price did not disappoint, reaching new highs - now doubling in the past two years.
But with a high share price comes a demanding forward price-earnings ratio of more than 20 times, especially so when controlling shareholders have now cashed out more than $2 billion of shares in the past nine months - the latest after the 2004 interim results. Are things really as good as they seem?
Esprit Holdings has an interesting pedigree with its past and present founders part European, American and from Hong Kong. However, its sales are distinctly less cosmopolitan - less than 10 per cent of sales come from Asia, never mind Hong Kong. Remove some layers and Esprit looks rather Germanic.
The retailer/wholesaler's biggest success is dressing thirtysomething German ladies in mainly Asian-sourced, French-sounding clothes. In Europe, 61 per cent of its sales are ladies wear, while Germany itself accounts for more than half of total sales.
Esprit's European connection dates to 1997 when it bought Esprit Europe in a $1.8 billion deal. While the business has prospered, expansion in Asia has been less successful. This mattered less as sourcing goods predominately in Asia and selling into a strengthening euroland currency has proved in retrospect a master stroke.
Other firms dependent on non-dollar earnings have benefited from the weaker greenback but perhaps none to the extent of Esprit, which records 90 per cent of its sales outside its reporting currency. Quantifying the impact is difficult, yet it is possible to see how conventional accounting treatment can make good numbers look better.