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Esprit Profits Increase but Shares Slip

The company says it is making good progress on its turnaround plan.

HONG KONG — Esprit Holdings Limited reported higher profits for its most recent fiscal year, but saw shares drop by as much as 8.8 percent Wednesday after it missed analysts’ forecasts.

Esprit said net profit for the 12 months ended June 30 grew more than 11 times to 873 million Hong Kong dollars, or $111.8 million, from the year-earlier figure of 79 million Hong Kong dollars, or $10.1 million. Though higher, the net profit fell short of consensus analysts’ opinion forecast of 995.8 million Hong Kong dollars, or $128.4 million, to 1.01 billion Hong Kong dollars, or $130.4 million.

Esprit said the cost of divesting its North American operations were less than previously forecast and the company was able to book a write-back of 696 million Hong Kong dollars, or $89.7 million, on a provision made for store closures. Meanwhile, marketing expenses rose to 1.57 billion Hong Kong dollars, or $206 million, from 984 million Hong Kong dollars, or $126 million, in the previous fiscal year.

Operating profit also improved significantly, jumping 69.2 percent to 1.17 billion Hong Kong dollars, or $149.77 million, while sales for the period declined 10.7 percent to 30.17 billion Hong Kong dollars, or $3.86 billion. The Hong Kong dollar is pegged to the U.S. dollar.

The shares closed on the Hong Kong Stock Exchange at 12.34 Hong Kong dollars, or $1.58, down 6.9 percent.

Esprit chairman Raymond Or voiced a cautious outlook for the future.

“The operating environment is likely to remain challenging in the new financial year with the unresolved European debt crisis and the slowdown in China’s economic growth,” he said. “We will exert vigorous efforts to ensure that the initiatives will produce results at an even faster pace and create an inspiring shopping experience for our customers.”

Speaking at his last Esprit press conference, outgoing chief executive Ronald Van der Vis went over details of the company’s progress on the transformation plan.

Esprit made “tangible progress” in the first year of the transformation plan and the company is “laying a strong foundation for future growth,” he said.

Under Van der Vis, the company unveiled an ambitious plan last year to improve the “fashionability” of its brand, which it has acknowledged has lost its appeal with shoppers. The company has exited the North American market and is focusing on Asian and select European countries for future growth.

Van der Vis said Wednesday that sales generated by a London-based new trends division have been better than expected, with sell-through more than double that of other collections. Given the warm reception, the company is planning to roll out the collection to Asia and expand to a men’s trends collection. Esprit is also talking to wholesalers. Van der Vis wouldn’t divulge the margins on the trends collection, saying only that the emphasis is on exceeding customers’ expectations and on providing good value.

The company has also opened a Hong Kong-based design hub to create designs for mainland China. China now makes up 8.6 percent of total group revenue, up from 7.9 percent in 2011, and the company intends to expand its presence in China from 191 cities to 400 by 2014/2015 and increase points of sale from 1,013 to 1,900.

Esprit also said it has successfully centralized its buying functions, putting it on track to achieve annual savings of 1 billion Hong Kong dollars, or $128.9 million, by 2014/2015. As part of this centralizing, Esprit has reduced the number of suppliers by 21 percent, the number of factories it works with by 29 percent and also successfully reduced its rejection rate by half. The company is expanding its sourcing footprint to new markets such as China, Bangladesh, Indonesia and India while reducing its share of sourcing agents by 28 percent

New chief executive officer Jose Manuel Martinez Gutiérrez was present at the press conference and made a few introductory remarks. Gutiérrez, a veteran of Inditex, has been on the job only 10 days, so he kept his remarks short. He said he “fully agrees with the fundamentals of the transformation plan” but couldn’t yet give specifics on what changes may be made in the future.