By  on February 3, 2010

HONG KONG — Esprit Holdings Ltd. saw lower profits and sales in the six months ended Dec. 31 on the back of a lackluster wholesale business.

The company said Wednesday net profits slid 5.2 percent to 2.71 billion Hong Kong dollars, or $349.6 million at average exchange rates, while turnover decreased 3.1 percent to 18.5 billion Hong Kong dollars, or $2.39 billion. The company said its retail turnover grew 9.5 percent, whereas the wholesale environment remained challenging as buyers continued to purchase cautiously.

“The wholesale order book between January to April this year continues to show a mid-teen percentage year-over-year decline in local currency, but we have seen the gap improving on a month-by-month basis,” said Ronald Van Der Vis, the company’s chief executive officer. “Though the wholesale market is gradually opening up new budgets for collections, we don’t expect to see any real positive changes until the next fiscal year.”

Operating profits fell 1.3 percent to 3.3 billion Hong Kong dollars, or $434 million, though its operating profit margin remained stable, increasing slightly by 0.3 percentage points.

Turnover of its wholesale business, meanwhile, dipped 14 percent to 8.7 billion Hong Kong dollars, or $1.1 billion, as the group struggled to cope with slow orders on the back of the recession.

“The wholesale and retail environment in Europe remains very challenging. The consumer is still reluctant to buy, and retail traffic is still negative in comparison to the same period a year earlier,” he said. “We are, of course, dissatisfied with the wholesale business, but remain confident we will first see an improvement in the retail and franchise environment before wholesale. We are ruling out short-term measures such as discounts and taking back merchandise because this will undermine our business model in the long term.”

The company has worked at refining its product strategy, introducing brand books and half-year concepts for each division to achieve more differentiated collections and product newness.

Retail turnover reached 9.6 billion Hong Kong dollars, or $1.2 billion, underpinned by a 10.2 percent year-over-year increase in retail selling space. The retail business now contributes 52 percent to the company’s total turnover.

For the remainder of the fiscal year, Esprit will focus on improving quality; opening larger and better stores to heighten store efficiency, and improve brand building. It is on track to achieve its target of a 5 to 10 percent year-over-year growth in retail selling space with the opening so far of two pilot store concepts, in Hong Kong and Oldenburg, Germany. There were 829 directly managed stores at the end of 2009.

The company is finalizing the details of a buyback plan of its Chinese joint venture partner, China Resources Enterprise. The move will give Esprit full control of its brand in Mainland China, where there are more than 900 points of sale in 150 cities.

Once integration is complete, Esprit expects to increase sales productivity, improve stock turn and lower the cost of sourcing. The company aims to raise market penetration to more than 450 Mainland Chinese cities in the long term.

“The buyback allows us to control our brand and its destiny. China represents a new growth engine for Esprit, and we believe it has the potential to become our biggest market,” said Van Der Vis. “In addition, it is also an important step for Esprit in becoming a truly global company as our presence in Asia Pacific will be strengthened significantly and hence it will balance our geographical spread further.”

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