Esprit is struggling to stabilise its business performance

Esprit is struggling to stabilise its business performance

Esprit is tweaking its existing turnaround plan to focus more on fast fashion, after the company swung to a full-year loss as its efforts so far failed to gain traction.

The fashion firm sees the next year as yet another period of transition as it works to stabilise its business performance and to "build the basis for a sustainable turnaround".

The company yesterday (10 September) admitted it was not achieving the goals set out as part of its transformation plan announced in September 2011.

The group recorded wider than expected full-year losses, reaching HKD4.3bn (US$554.5m) over the year ended 30 June, against a profit of HKD873m last year. 

Sales fell 11.5% in local currency terms to HKD25.9bn, mainly due to a decline in Europe as well as the decision to shutter its North American operations. Excluding the impact of the store closures, turnover fell 7.7% on the prior year to HKD25.52bn.

In a presentation to analysts the company said it was not meeting forecast sales growth of 8-10% per annum for the 2012-15 financial years, with sales declining 10.5% over the 11/12 financial year, and falling 11.5% during FY12/13.

Sales in China, which were expected to reach HKD6bn by FY14/15, fell to HKD2.4bn in the last financial year. Operating profit margin, which was expected to reach 15% following the transformation, has continued to fall to -16.1% this year. And while the company was expecting HKD1bn per year in savings from its new sourcing initiatives by FY14/15, during the past year sourcing costs actually rose by HKD600m.

The company has seen significant upheaval in recent years, disposing its North American operations and shutting many more underperforming stores, particularly across Europe.

This change is set to continue, with the company saying that it expects FY13/14 to be a "period of transition," where it "aims to stabilise business performance and build the basis for a sustainable turnaround".

Esprit's management admitted that in the short term it does not "foresee a visible improvement in top line given the weak macroeconomic environment, our reduced selling space, and the fact that most of the structural measures we are putting in place are still work-in-progress."

Short-term turnaround plans
The short-term focus will be on returning the brand to profitability through cost reduction, inventory normalisation and overhauling its operations.

Reducing the cost of business is one of the key focuses for the group's management, with the company needing to adjust expenses so that they are in line with declining turnover, while also ensuring that it has the necessary resources to complete its transformation programme.

It plans to enhance efficiencies by treamlining processes and organisational structure. It will also rationalise its business units and distribution network to help focus its resources on areas that are profitable and core to the group.

The company will also work to stimulate inventory sales, avoid further increases in inventory, and clear out aged inventory on a timely basis, it said. This will see the company clear out out-of-season stock, as well as setting up a network of outlets to more efficiently manage inventories in the near term.

Medium-term plans
In the medium term, the company will work to build a sustainable platform for growth, which will include "building a high performance product engine" that will enhance speed to market and cost efficiency. To this end, it plans to adopt a more vertically integrated business model. 

It is also looking to enhance the appeal and productivity of its stores by introducing and extending best practices, and by rolling out its new store concept.

"The new concept has had an increasingly positive impact on business performance since its inception and therefore we believe it has significant high potential going forward. We expect it to become a pillar of our brand enhancement strategy in the near future," the company said.