Bloomberg News

Esprit Falls Most in Two Years After Saying Profit Will Drop

September 02, 2011

(Updates with analyst’s comment in sixth paragraph.)

Sept. 2 (Bloomberg) -- Esprit Holdings Ltd., the biggest Hong Kong-listed clothing retailer, slumped the most in two years on the city’s stock exchange after saying it expects profit to drop on unspecified store-restructuring costs.

Esprit plunged 10 percent, the most since Aug. 27, 2009, to HK$19.64 in Hong Kong trading. It was the biggest drop on the benchmark Hang Seng Index, which fell 1.8 percent.

Net income for the fiscal year that ended June 30 will “record a significant decrease,” the retailer said in a filing yesterday. Esprit made more than 80 percent of last year’s revenue in Europe, where sales have slumped, and three people familiar with the matter last month said it’s exploring the sale of its North American operations.

“This will likely impact fiscal year 2011’s dividend payout, Vineet Sharma and Phoebe Tse, Hong Kong-based analysts at Barclays Capital, said in a note to clients today. Esprit’s statement ‘‘could reflect an inability to achieve timely closure for some loss-making stores,” said the analysts, who downgraded the stock to “equal weight” from “overweight.”

Today’s slide in Esprit’s share price extended this year’s loss to 47 percent, wiping off more than $2.8 billion from its market value. The stock’s retreat this year is the biggest on the Hang Seng Index.

Dividend Yield

“We think earnings will keep declining or be flat for a few years,” Aaron Fischer, head of consumer research at CLSA Asia-Pacific Markets, said in an e-mail. “Some investors like the dividend yield but we have been highlighting that is at risk if earnings disappoint.”

Annual sales will be little changed, said Esprit, which expects to report earnings on Sept. 15. It didn’t provide more details on the costs and how they were incurred. Esprit’s board approved a plan yesterday that includes restructuring store operations, it said, without providing specifics.

The restructuring “can be seen as positive in the sense that it suggests strategic decisions taken by the board, such as rationalizing the business,” Anne Critchlow, an analyst with Societe Generale in London who recommends buying the stock, said in an e-mail late yesterday.

Esprit, which started in 1968 in California, has reported declining profit for two years as it contends with higher materials costs and competition from Hennes & Mauritz AB and Inditex SA’s Zara. Esprit’s shares slid 29 percent in 2010.

Analysts’ Estimates

Profit margin of 9.97 percent in the six months through June last year was the lowest since 2002, according to data compiled by Bloomberg. Esprit’s profit margin was 12.1 percent in its fiscal first half that ended in December last year.

Profit for the year ended June 30, 2011 may fall 24 percent to HK$3.2 billion ($411 million), according to the mean estimate of 12 analysts in a Bloomberg survey. Sales may rise 0.7 percent to HK$34 billion, according to the mean estimate of 19 analysts.

Esprit’s forecast decline in profit was based on a preliminary assessment by the board, it said.

The retailing environment in Europe, where Esprit made 83 percent of sales last year, is difficult. Carrefour SA, the continent’s largest retailer, cut its profit forecast for this year on Aug. 31, saying it expects operating income to drop about 15 percent.

‘Insufficient’ Closures

H&M reported an 18 percent decline in second-quarter profit as costs increased. Inditex’s first-quarter profit rose to 332 million euros ($475 million) from 301 million euros a year earlier, growth that beat analysts’ estimates.

“We are not surprised by this at all as we felt that last year’s closure of 33 stores was grossly insufficient as we believe the company is losing money in most markets aside from Germany, the Benelux countries and China,” CLSA’s Fischer said.

Esprit had 1,154 directly managed retail stores worldwide at the end of last year, according to its first-half earnings report. It had 12,056 more points of sale, which include franchises and “shops in stores.”

Esprit was started in 1968 by Susie and Doug Tompkins, who sold clothes out of the back of a station wagon in San Francisco, according to the company’s website. The transformation into a global brand began three years later when they met Michael Ying, who was chairman from 1993 to 2006.

Ronald Van der Vis was hired as chief executive officer in 2009, replacing Heinz Krogner, who also stepped down as chairman this year. The current chairman is Hans-Joachim Koerber, former chief executive officer of Germany’s Metro AG.

--Michael Wei, Frank Longid, Editors: Frank Longid, Nicholas Wadhams

To contact Bloomberg News staff for this story:

To contact the reporters on this story: Michael Wei in Shanghai at mwei13@bloomberg.net; Frank Longid in Hong Kong at flongid@bloomberg.net

To contact the editor responsible for this story: Frank Longid at flongid@bloomberg.net


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