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February 26, 2019

Esprit turnaround plan to boost product appeal

By Beth Wright

Esprit has announced it is to build a “new model for the future”, including plans to sharpen brand identity and improve its product offering, as the Hong Kong-listed fashion group revealed lower revenue and a wider net loss in the first half of the year. 

At the company’s results press conference in Hong Kong today (26 February), CEO Anders Kristiansen said the brand has a “great plan” and is making the bold changes required to restore Espirt to sustainable growth and profitability.

“The teams are working intensively on all initiatives but the brand re-positioning and changes in product will take time to become visible and attract customers back”.

For the six months ended 31 December, the fashion brand reported a net loss of HK$1.77bn (US$225.5m), compared to a net loss of HK$954m a year earlier. The company noted the figure takes into account exceptional items of HK$1.42bn, mainly in connection with the restructuring plan to eliminate loss-making stores and reduce headcount. 

Chief financial officer Thomas Tang said it is important to highlight that all of the one-off restructuring costs are necessary to reduce losses and build a healthier platform for future growth.

Meanwhile, gross profit margin slipped 1.6 percentage points to 51.3%, mainly due to investment in improving product quality and a higher level of discount. Espirt said it is worth noting that while there is a year-on-year decline in gross profit margin for the first half, the group is seeing positive improvement from a quarter-on-quarter perspective.

Group sales fell 14.4% to HK$6.77bn, compared to HK$8.04bn last year. Esprit said the decline in revenue was the result of a combination of the impact of the group’s strategic rationalisation of its distribution footprint leading to a controlled space reduction of -11% year-on-year, and reduced customer traffic across the distribution channels due to “the weakness in brand identity and product appeal”. 

Moving forward, Esprit has outlined plans to build what it calls a “new model for the future”, designed to achieve a positive business performance.

This includes sharpening the brand identity of Esprit and putting the customer at the centre of everything the group does and improving the product offering and how it relates to the Esprit consumer and brand positioning. At the same time, the group says it is building a more efficient organisation and restructuring the cost base. This, it explains, includes reducing complexity and improving accountability throughout the organisation by becoming a “leaner and more responsive organisation”, and eliminating loss-making areas of the business in order to build a stronger foundation for the future.

As a result, Kristiansen warned the group expects the next two financial years to be a period of transition.

“We expect to see further decline in revenue in the next two years due to closure of loss-making stores, before reviving growth driven by product and brand initiatives,” he said.

Overall, the group expects a compound annual growth rate in revenue of a mid-to-high single-digit percentage in local currency between FY19/20 and FY23/24. In terms of underlying operating profit (EBIT), the group expects to achieve breakeven in two to three years’ time. Thereafter, underlying operating profit margin (EBIT margin) is expected to expand gradually to mid-single digit percentages by FY22/23 in local currency.

“While the group is confident of its strategic direction aimed at restoring its long-term sustainable growth and profitability, the ambitious nature of the work ahead, combined with the challenging and demanding market environment, may present uncertainty to its short-term performance,” added Dr Raymond Or, executive chairman of Esprit. “The group will continuously monitor its progress and performance, so as to proactively adapt and make appropriate adjustments in a dynamic manner as and when necessary.”

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