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Published
Jan 25, 2018
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Esprit has tough balancing act, issues H1 profit warning on Chinese and Q2 weakness

Published
Jan 25, 2018

Esprit Holdings is still a business in turnaround mode and it seems that its turnaround isn’t going anywhere near the way it would like just yet. The Hong Kong-based fashion retailer that sells mainly in Europe has issued a profit warning saying that it first-half loss will be big. Very big.


Esprit


In fact, it expects to post a net loss in a range of HK$950 million to HK$980 million, compared to a net profit of HK$61 million a year earlier. 

So what has gone wrong for the business? The company cited three reasons with higher taxes this year being one. But the weakness of its operations in China was even worse news as that’s much harder to overcome than a one-off higher tax rate. 

The company may do most of its business in Europe, but its Chinese sales matter and they have been falling. It said this decline has been “significant” in recent years, resulting in a negative impact of approximately HK$795 million before tax in H1. Ouch.

Beyond China, a larger than expected decline in overall revenue in Q2 was a big issue. Esprit had expected a “modest” decline due to “strategic rationalisation of our distribution footprint,” (which presumably means stores closures.) But Q2 was worse than it had planned for as its remaining physical stores’ sales proved weak.

As a result, the loss before interest and tax (and before the China impairment) for H1 should be around HK$150 million to HK$180 million. The figure was much wider than a loss of HK$13 million a year ago.

But there was a glimmer of good news as the gross profit margin slightly increased and operating expenses were further reduced, although the improvements weren’t enough to outweigh the negative impact of the revenue decline during the period.

The company’s shares were down over 16% on Thursday afternoon as it offered little in the way of encouragement. It said the operating environment continues to be "very challenging amid the rapidly-changing industry dynamics, and the financial performance in the second half remains uncertain.” Its full interim results will be out on February 28.

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