Esprit expects volatile year after swinging to profit

HONG KONG - Esprit Holdings Ltd's CEO expects further operational upheaval and a period of potentially "volatile" earnings after the clothier bounced back from a steep loss.

Jose Manuel Martinez Gutierrez on Tuesday said he is still changing everything from product development and supply chain processes to wholesale and retail operations, in a quest to match the results and fast-fashion model of former employer, Inditex SA brand Zara.

Early gains since Martinez joined in September 2012 have come from cost-cutting, but continued profitability depends on Esprit's product line, analysts say.

"The next phase is far more challenging," Martinez said in a briefing after Esprit reported earnings for the year ended June 30. "It will result in a volatile scenario for the company in the next 12 months. Still, we think it is a must."

Net profit reached HK$210 million ($27.09 million) or HK$0.11 per share in the just-ended year. That compared with a HK$0.113 StarMine SmartEstimate of 14 analysts, which is calculated by weighting contributor estimates based on timeliness and past accuracy.

Last year, the company, which has headquarters in Germany and Hong Kong, reported a loss of HK$4.39 billion, or HK$2.50 per share.

Esprit said revenue fell to HK$24.23 billion from HK$25.9 billion, and is likely to fall further as the clothier closes retail stores and wholesale facilities. However, Esprit said its gross profit margin should increase due to supply chain improvements.

Shares of Esprit rose as much as 9 percent after the results announcement to HK$13.52, the highest since April 29. They ended Tuesday at HK$12.74, up 2.7 percent versus a 0.5 percent decline in the benchmark Hang Seng Index.

Trouble in Asia

Esprit earns around 15 percent of revenue from China and other Asia-Pacific countries, but problems ranging from fewer customers in department stores to late deliveries led to double-digit sales declines in the region last year in both retail and wholesale. Esprit earns the bulk of its revenue in Europe.

To turn the situation around, Martinez said Esprit has closed unprofitable stores in China and Australia, and is adjusting pricing, trying to sell higher-priced items, and changing returns policies for wholesale customers.

Martinez's changes at Esprit are widely regarded as aggressive, and he said during Tuesday's presentation that he felt the company was running out of time.

"When I say we are running out of time maybe the easiest way to look at it is to look at the topline performance over the past five to seven years," he said. Revenue has declined steadily since 2008.

"There is a limit to how far you can go with 'opex' reductions," said Martinez, referring to operating expenses. There is also a limit to how long your customers will wait, he said.

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