By  on September 15, 2011

HONG KONG — Esprit unveiled Thursday a drastic restructuring plan that includes pulling out of the North American market and a few other European countries as the company posted a 98 percent plunge in full-year net profit.

Esprit said it has made a “strategic decision” to divest operations in North America, exit from retail operations in Spain, Denmark and Sweden, and close down certain additional nonprofitable stores elsewhere to focus on better performing markets. The decision will affect 93 directly managed retail stores in North America.

Ronald Van der Vis, group chief executive officer of Esprit, also said the company is “exploring all options” to divest the brand’s North American holdings.

This is the third consecutive year of decline in annual profit for Esprit, which has been struggling with weak consumer sentiment in Europe as well as higher material and labor costs. The company issued a profit warning earlier this month, but Thursday’s results were still well below expectations.

“The brand has gradually lost its soul over the past few years. The heritage of the brand has been neglected and the company lost its customer focus,” Van der Vis said in a prepared statement at a news conference.

Esprit posted net profit of 79 million Hong Kong dollars, or $10.1 million, for the year ended in June, down from 4.2 billion Hong Kong dollars, or $543 million, the year before. Revenue came in at 33.7 billion Hong Kong dollars, or $4.3 billion, about flat with the year before.

Speaking at a presentation to analysts and media, Van der Vis said the company has engaged a private bank to explore all options for its North American holdings, which have shown a combined loss of 1.6 billion Hong Kong dollars, or $205 million, over the last four years. That includes a sale, licensing, or closure. The ceo said he would prefer a partnership and would not sell the trademark.

Esprit is also shuttering unprofitable stores. The company said it is shutting down 80 such retail stores — 65 in Europe and 15 in Asia — incurring a loss of 1.7 billion Hong Kong dollars, or $218 million, as a result. The closures include all 10 directly managed retail stores in Spain, Denmark and Sweden which posted 256 million Hong Kong dollars, or $32.9 million, in retail sales in the fiscal year 2011.

Van der Vis also unveiled an 18 billion Hong Kong dollar, or $2.3 billion, “transformation” plan to “give the brand back its shine and recover its profitability.”

Esprit’s multibillion transformation plan includes a focus on core markets such as China, Germany and Benelux, opening around 200 new stores, and refurbishing stores across its entire network. Van der Vis also outlined plans to improve the product offering by using better fabrics, detailing and workmanship, and some restructuring of the design and sourcing departments.

In monetary terms, the plan includes spending 2.7 billion Hong Kong dollars, or $346 million, on retail store expansion, another 3 billion Hong Kong dollars, or $384 million, in retail store refurbishment, as well as 11.5 billion Hong Kong dollars, or $1.47 billion, in cumulative additional operating expenditure over the next four years. About 30 percent of all spending will be dedicated to China.

Because of the increased spending, the company said it expects to post an operating margin of 1 to 2 percent, which analysts say would be close to a zero net profit during the transformation period. Esprit also said it expects to post a 3 to 5 percent decline in sales in the next fiscal year, as well as a 2.1 billion Hong Kong dollar, or $269.3 million, loss as a result of divestments. Esprit shares fell nearly 10 percent Thursday.

After the “transformation” period, the company expects to post operating profit margin of about 15 percent.

Aaron Fischer, analyst at CLSA in Hong Kong, said he thinks the transformation plan “makes sense” and is “the right plan” but still carries a lot of risk.

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