Bloomberg News

Esprit Plummets Second Day as Top Management Quits

June 14, 2012

Esprit Plummets Most Since ’97 as Top Management Quits

The Esprit Holdings Ltd. logo is displayed outside a store in Hong Kong, China. Photographer: Jerome Favre/Bloomberg

As Esprit Holdings Ltd. (330)’s chief executive officer and chairman quit within 24 hours of each other, investors’ biggest question was: Who’s in charge?

The fashion brand left the financial community in the dark on the resignations and succession plans. Chief Executive Officer Ronald Van der Vis quit June 12 and the Hong Kong-based company reported the departure of its chairman a day later.

The exits highlight the steady decline of a once-popular brand that has lost out to rivals including Hennes & Mauritz AB (HMB) and Inditex SA (ITX)’s Zara. The departures, which come six months after the chief financial officer resigned, leave Esprit with a gap in senior management as it struggles to recover from a three-year profit decline.

“The moves could lead to questions regarding whether there are issues with the operation/accounts or there is a power struggle among the management team and the board,” Anne Ling, an analyst at Deutsche Bank AG, said in a note to clients.

The exact timing of the CEO’s departure will depend on “how quickly we can get a replacement,” said Patrick Lau, head of investor relations, declining to comment further on succession. Van der Vis is required to give 12 months’ notice, according to Lau, and the company said he will leave on or before July 1 next year. Chairman Hans-Joachim Koerber is being replaced by independent director Raymond Or Ching Fai.

Top Priority

Finding a new CEO is a “top priority,” Or told Hong Kong broadcaster Now TV today, without specifying a timeline. Or is the former chief executive officer of Hang Seng Bank Ltd. (11)

Esprit’s stock plunged 22 percent in Hong Kong on June 13, the most in 15 years, on news of the CEO leaving, before trading was suspended. The chairman’s departure was reported after the share suspension. The shares dropped 11 percent to HK$9.37 in Hong Kong trading at 1:34 p.m. today.

“We see strong support at the HK$7-8 range, where private equity should see a reasonably attractive entry point,” Religare Capital Markets analyst Peter Williamson said in a note.

Esprit cited personal reasons for both exits. The retailer has also had departures from its board, reporting the resignation of Francesco Trapani, a non-executive director, for “other personal commitments” in February.

“Who’s going to steer the company?” said Gabriel Chan, an analyst at Credit Suisse Group AG, after the CEO quit. “We know nothing more than the one-page announcement, and investors hate such kind of opaqueness.”

Competitors Gain

The drop contrasted with Arteixo, Spain-based Inditex, which advanced 12 percent in June 13 Madrid trading after reporting a 30 percent gain in first-quarter profit by adding stores in emerging markets and expanding online offerings.

Esprit had revenue of HK$33.8 billion ($4.4 billion) for the year ended June 2011, compared with Inditex’s 13.8 billion euros ($17.4 billion) for the year ended January.

“The fact that Zara and H&M are doing well indicates that the industry is in a good shape,” said Sandy Mehta, chief investment officer at Value Investment Principals Ltd. “Esprit is still a strong global brand, but competition is getting tougher and it will take longer for Esprit to reposition itself.”

Esprit board members and senior managers couldn’t be reached after the company’s statement. Van der Vis declined to comment when reached on his mobile phone.

San Francisco Brand

Esprit was born in 1968 in San Francisco, when Susie and Doug Tompkins started selling clothes out of the back of their station wagon. As the brand took off, sales topped $100 million in 1978 and international partnerships in Hong Kong and Germany were formed, according to the company’s website. By 1996, the brand was ranked 28th out of the 100 most recognized brands in the U.S., the website says.

Early signs of trouble appeared in early 2009, when the clothing retailer said first-half profit fell for the first time in more than a decade on the recession in Europe, where it made four-fifths of its sales.

The clothier hired Van der Vis to replace Heinz Krogner in 2009 to help revive the brand.

Van der Vis, a former CEO at optical retail group Pearle Europe BV, came to Esprit with more than a decade’s experience in top roles in brand-building and retail, according to the company’s website. At Esprit, he pushed to raise sales in China and improve designs as part of his turnaround plan.

Trendy Competitors

In February, he said the clothing retailer would add sourcing offices in India and Indonesia to cut costs and add 40 to 50 stores in China as part of its drive to boost profit.

Esprit’s earnings have fallen as it loses customers to Zara and Stockholm-based H&M, which are seen as trendier by some younger shoppers. An Esprit store in Hong Kong’s Tsim Sha Tsui area was quiet on the afternoon of June 13.

“I have an 11- and a 16-year-old and after we’ve been to the U.S., H&M, that’s what they prefer,” said Lorry Leoncie, a tourist from Manila, coming out of a nearby H&M store.

In September, Esprit reported that profit fell 98 percent and, in a statement, said the brand “has gradually lost its soul over the past few years.”

“Esprit had become too much a T-shirt company,” Van der Vis said in the interview with Bloomberg earlier this year. “The customers I spent a lot of time talking to said: Please give me back the Esprit I used to know.”

Stock Declines

Esprit, which lost 73 percent of its market value last year, reported a 74 percent drop in first-half profit in February.

One issue: Esprit gets about 79 percent of its revenue from Europe, which is confronting a debt crisis and high unemployment. Hennes & Mauritz received 52 percent of its sales in the fiscal year ended November from the euro zone excluding Finland, while Inditex got 37 percent from the European Union and 27 percent from Spain, based on data compiled by Bloomberg.

In February, the brand born in San Francisco said it was closing all stores in North America after failing to find a buyer for the unprofitable business. Its U.S. and Canadian operations lost HK$1.6 billion in a four-year period, Esprit said last year.

Turnaround Continues

While announcing Van der Vis’s departure, Esprit said it plans to continue with the turnaround efforts. The 44-year-old Dutchman is leaving just as Esprit started showing some improvement in same-store sales. The retailer in May said revenue at outlets open more than a year rose 0.5 percent in the three months ended March after dropping 4.6 percent in the six months to December 31.

“The new management team will face a big challenge,” said Credit Suisse’s Chan. “Not only to revive the brand, but also putting a team together.”

Van der Vis announced his departure after the resignation in December of Chief Financial Officer Chew Fook Aun. Thomas Tang, previously CFO at Sino Land Co. (83), succeeded Chew last month. Tang is at the early stages of learning about Esprit and would find it difficult to take a temporary CEO role, Mohan Singh, an analyst at CITIC Securities International, wrote to clients. “The company will immediately lack clear leadership,” he said.

Key executives are new as well. China chief Holly Li, Adidas AG (ADS)’s former general manager for north China, joined Esprit on Feb. 1.

“It’s going to be very hard for the company to look for another CEO, as there aren’t that many people out there with that kind of experience,” said Andrew Sullivan, principal trader at Piper Jaffray Asia Securities Ltd. in Hong Kong. “It’s going to take much longer for the company to rebuild its brand.”

To contact the reporter on this story: Anjali Cordeiro in Hong Kong at acordeiro2@bloomberg.net

To contact the editor responsible for this story: Anjali Cordeiro at acordeiro2@bloomberg.net


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