Esprit expects the second-half to be challenging

Esprit expects the second-half to be challenging

Hong Kong based fashion firm Esprit has swung to a first-half profit after efforts to overhaul its operations started to gain momentum. But despite the good news, analysts have mixed opinions on how long the transformation will take.

The Esprit group last year tweaked its turnaround plan to focus more on fast fashion by adopting a faster and more efficient vertically integrated business model.

Esprit has been working on this with its Trends division, which is being used as a test case. Initially set up in London to deliver ‘fast fashion’ with a short production time to selected European shops, the company is now looking to roll the model out to some of its other businesses. Benefits include cutting the design-to-shelf lead time from nine months to three or four.

In a presentation of the group's results on Friday (21 February), Esprit CEO Jose Manuel Martínez Gutiérrez says: "We intend to apply the valuable lessons learned to other product divisions in due course."

However, the model will only be implemented in 12 months' time at the earliest.

Sales weakness
During the first half of its financial year, Esprit's turnover stood at HKD12.81bn (US$1.65bn), down 5.5% on a reported basis and dropping 9.3% in local currency.

This, the company said, was because of the negative downturn in Germany in December and stock availability issues in Asia.

In China, turnover fell 24.5% in local currency to HKD984m. The retail business, which represented 72.4% of its total turnover in China, saw turnover fall 13.1% in local currency terms, following the closure of underperforming stores.

For the wholesale business, turnover slumped 43.2% year-on-year, hurt by a challenging macro environment, a fall in wholesale space, and inventory clearance.

"We know the results for China are not satisfactory and we are strengthening our management team at all levels," Esprit CFO Thomas Tang told analysts.

In addition, the company named former Giordano executive Bernard Mah its new managing director for China to oversee growth in the market.

Asked when Esprit will finish its cost reduction programme, Martínez Gutiérrez says: "Never. I think keeping costs down is an effort of continuous supply.

"The moment you relax, operating expense goes up again and then you face challenges in the business. So we don't have a plan that is defined with a beginning or an end. Yes, we have reached the target of bringing it below 50% of net sales, but our goal is to have it as small as possible."

The second half of the year, Martínez Gutiérrez noted, will still be challenging given the macro situation. 

In a note sent to just-style, UBS analyst Erica Poon Werkun says management is staying focused on cost cutting and cash preservation.

"We remain positive on the strategic direction of Esprit's transformation. It is at an early stage of implementation, so we would expect some bumps along the way with respect to sales and margin data before more consistent trends can be formed."

However, Nomura analyst George Hsu is less optimistic and believes Esprit’s "recovery path has not stabilised yet and should still take another few quarters".

He adds: "We reiterate our view that Esprit already has a decent management team in place but the wholesale legacy is unfavourable, which takes time to adjust. We do not see a positive catalyst in the short term."