Esprit returns to profit as Hong Kong office sale offsets waning demand

The Hong Kong-based clothing giant beat analysts’ estimates with full-year earnings of HK$21 million

PUBLISHED : Tuesday, 20 September, 2016, 8:50pm
UPDATED : Tuesday, 03 July, 2018, 7:51pm

Global clothing retailer Esprit Holdings booked better-than-expected full year earnings, as asset disposals and improved cost control cushioned a fall in sales caused by a lacklustre economy and waning demand.

The Hong Kong-based apparel maker, which generated more than four fifths of its revenue in Europe, reversed its fortunes for the year ended June 30, delivering a net profit of HK$21 million compared with a net loss of HK$3.70 billion a year earlier. That surpassed the consensus among analysts polled by Reuters of a net loss of HK$265 million.

Esprit’s sales dropped by 1.1 per cent from a year earlier to HK$17.79 billion in local currency.

Esprit is positioned in the mid-priced segment, which we see as a competitive disadvantage for the company
Christopher Leung, analyst, HSBC

Although that’s slightly below the mean forecast of HK$17.81 billion, the company said it’s a sign of some stability returning after four consecutive years of larger declines.

Amid a weak euro and sputtering Chinese and European economies, Esprit has undergone a painstaking structural overhaul, shutting down stores in underperforming regions and revising pricing strategies.

But its recent return to profit is largely the result of a HK$1.34 billion windfall it obtained by selling its Hong Kong office premises and a write-back of tax provisions. The apparel giant said in July the gains would help offset the growing expenses of staff reduction plans as well as the closures of some outlets in Hong Kong and Macau, where consumer sentiment and tourist numbers have fallen.

“We have seen improved sales productivity in European retail operations, but productivity in our Asia-Pacific stores continued to decline,”said chief executive Jose Manuel Martínez in Hong Kong.

Esprit shares settled at HK$6.72 on Tuesday, down 0.74 per cent. The stock has lost 21.5 per cent this year.

The board decided there would be no dividend this year, the same as in 2015.

Esprit said in June that it had expected Britain’s decision to leave the European Union to further weigh on retail sentiment in Europe, where the majority of its operations were based, against a backdrop of a softening euro and escalating political economic uncertainties.

Deutsche Bank AG analysts led by Anne Ling warned in a note on June 29 that Esprit was “one of the most vulnerable companies” to the exchange rate volatilities heightened by Britain’s “leave” vote.

“Such macro headwinds will hinder management’s effort in restructuring the operation and rebuilding its brand,”they wrote in the note.

The company might lay off 10 per cent of its employees in Germany, which contributed nearly half of total sales, Deutsche Bank quoted Esprit’s chairman Raymond Or as saying in the annual general meeting on June 28.

“Unlike the fast fashion retailers, Esprit is positioned in the mid-priced segment, which we see as a competitive disadvantage for the company as consumers tend to trade down in a slowing economy,” said HSBC analysts led by Christopher Leung, who downgraded the stock to “Reduce” this June.

Despite a gloomy European outlook, Esprit managed to reverse its year-on-year decline in comparable store sales on the continent - a crucial gauge of a retailer’s well-being - to 9.2 per cent growth in local currency, thanks to new products and an improved business model.

Esprit’s e-commerce business also fared better, logging a 15.3 per cent revenue jump in local currency from a year earlier.