Bloomberg News

Esprit Drops on CFO Departure Amid Drive to Revive Earnings

December 06, 2011

(Updates with Lone Pine, Marathon increasing stakes in eighth paragraph.)

Dec. 6 (Bloomberg) -- Esprit Holdings Ltd., the clothing retailer struggling to recover from a 98 percent profit slump, fell the most in more than two months in Hong Kong trading after Chief Financial Officer Chew Fook Aun quit.

The biggest clothing retailer listed in Hong Kong fell 11 percent to HK$10.72 and the close of trading in the city, its biggest drop since Sept. 21. The stock is down 71 percent this year compared with an 18 percent drop for the benchmark Hang Seng Index.

Chew’s resignation for personal reasons will take effect by June 1 as he is “unable to spend the required time in Europe,” the Hong Kong-based casual clothing chain said in a statement yesterday. Esprit, which on Sept. 15 said its brand had “lost its soul,” faces declining sales on the continent, where it made 79 percent of revenue.

“His departure comes at a crucial time as the company has just begun executing its transformation plan,” Vineet Sharma, a consumer analyst at Barclays Capital who has an “underweight” rating on the stock, said in a phone interview today. “It raises concerns on whether the turnaround plan could have execution risks or delays.”

Chief Executive Officer Ronald Van der Vis has said he plans to turn the retailer around by improving fashion designs to revive earnings in Europe while doubling China sales in four years. Esprit is looking in and out of the company for Chew’s replacement, Van der Vis said on a conference call yesterday.

Investors Raise Stakes

The company’s slide today is the biggest on the Hang Seng. Esprit yesterday climbed 8.7 percent after saying it would hold conference call at 5 p.m. local time.

The stock has plunged 92 percent from its highest close of HK$127.744 on Oct. 30, 2007, as rivals including Hennes & Mauritz AB and Inditex SA’s Zara lured customers away.

Investors including Lone Pine Capital and Marathon Asset Management have increased their holdings. Lone Pine raised its stake to 7.2 percent from 3.22 percent in the past two months, making it Esprit’s biggest shareholder, according to Hong Kong stock-exchange filings and data compiled by Bloomberg. Marathon Asset raised its holding to 6.25 percent from 4.95 percent in the past six weeks, according to the filings.

Declining Europe Sales

The chain has begun “grouping various strategic functions in its business headquarters in Ratingen, Germany,” the company said in the statement. “This would also require the group chief financial officer to travel extensively to Europe to supervise the implementation of the transformation plan.”

It has no plans to move its financial headquarters out of Hong Kong, Van der Vis said on the conference call.

Same-store sales in Europe fell 9.2 percent in local currency terms in the three months through September. Esprit on Oct. 31 said it faced “an increasingly challenging business environment” in its biggest market.

Chew was appointed chief financial officer in February 2009. He previously held the same position at The Link Management Ltd., manager of the Link Real Estate Investment Trust. He was Kerry Properties Ltd.’s CFO from 1996 to 2004.

Chew, who boosted his stake in Esprit last month by buying 100,000 shares, will pursue a career “outside the company,” according to the statement. “The changes in the role require extensive traveling which I cannot afford,” Chew said on yesterday’s conference call.

‘Safe and Boring’

Chew’s stock purchase “implies he believes in the outlook for the company,” said Gary Pinge, regional head of consumer and gaming at Macquarie Research.

Net income plunged last fiscal year because of the cost of closing stores in Europe and selling its U.S. and Canada operations. Sales in the year through June increased less than 1 percent after declining in the previous two years.

The retailer that started in California more than 40 years ago hired the former brand director of Hennes & Mauritz in 2010 to rejuvenate its fashions, which Van der Vis said in September “became too safe and boring.”

Esprit hired Holly Li, Adidas AG’s general manager for north China, to be its CEO in the country starting Feb. 1, it said last month.

Capital Spending

Van der Vis plans HK$7 billion in capital spending over four years, mostly to expand or refurbish stores. A further HK$11.5 billion will be allocated to operational spending, of which HK$6.8 billion is for branding, Van der Vis said in September at his earnings presentation, made in front of a backdrop featuring model Gisele Bundchen.

“We are still comfortable that the transformation plan is secure,” he said on a conference call yesterday to discuss Chew’s resignation.

A marketing campaign has increased “consumer consideration” in both Germany and China, according to an presentation the company made to investors last month.

Esprit made about 42 percent of last fiscal year’s HK$33.8 billion sales in Germany, with 7.9 percent coming from China, according to data compiled by Bloomberg.

The apparel company is “on track” with its plan to close 80 stores worldwide, including 24 in Germany, according to the investor presentation.

Esprit, with a market value of about $1.8 billion, trades at 41 cents per dollar of revenue, the lowest of clothing companies valued at more than $1 billion, according to data compiled by Bloomberg. H&M trades at 3.28 times sales, while Inditex is at 2.98. Esprit’s climb yesterday ahead of the conference call shows “how much negativity is built in” the stock, Macquarie’s Pinge said.

Esprit had more than 1,100 directly managed retail stores, of which 300 were in China, as of June. Esprit also had more than 11,700 wholesale outlets, which include franchises and shops in stores.

--With assistance from Anjali Cordeiro in Hong Kong. Editors: Dave McCombs, Anjali Cordeiro

To contact the reporter on this story: Vinicy Chan in Hong Kong at vchan91@bloomberg.net

To contact the editors responsible for this story: Frank Longid at flongid@bloomberg.net; Stephanie Wong at swong139@bloomberg.net


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