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Esprit Widens FY Losses

The company posted a net loss of 3.78 billion Hong Kong dollars, or $487.29 million, while sales declined 14.1 percent.

Inside the Esprit store.

HONG KONG — Esprit Holdings Limited widened its losses for the fiscal year amid declining sales.
 
The company, which is undergoing restructuring efforts to turn around its business, said Tuesday that it posted comprehensive net loss of 3.78 billion Hong Kong dollars, or $487.29 million, for the year ended June 30, compared with a year earlier loss of 366 million Hong Kong dollars, or $47.18 million. The Hong Kong dollar is pegged to the U.S. dollar.
 
On an operating level, Esprit posted a loss of 4.17 billion Hong Kong dollars, or $537.57 million, compared with a year earlier profit of 1.17 billion Hong Kong dollars, or $150.83 million.
 
Sales declined 14.1 percent to 25.90 billion Hong Kong dollars, or $3.34 billion, on a “weak” performance at retail and a strategic move to divest the brand’s North American operations.


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Group chief executive Jose Manuel Martinez Gutierrez said that in the near-term, over the next six to 12 months, his biggest priority is to stabilize sales per square meter. The chief executive, speaking at a press conference here, said that the expects a slight decline in the company’s top line in the coming year due to the reduction of retail space but said he believes the company would be profitable next year as it works to reduce costs.
 
Martinez ticked off several operational improvements that he is focusing on, including reducing the operating expenditure to net sales ratio to less than 50 percent, moderating capital expenditures, reducing inventory by 10 percent, and reducing lead time from the current nine months to three months.
 
The latter, Martinez said, is the biggest challenge because it would involve changing the company’s entire business model.
 
“It really affects the wholesale business. It changes the way they buy from us, the way we present our collections to them. We really need to do it very carefully,” he said, estimating that the transition would take at least 12 to 18 months.
 
But once that is done “at least, we will move into the right business model for this business. Consumers today expect to get what they want as soon as possible, and if you don’t, somebody else will do it.”
 
Martinez, who worked at Inditex for nine years before joining Esprit last year, said he stands behind the company’s transformation plan and — if anything — is expanding the transformation further by focusing on altering its business model.
 
“We’re changing even more than the original plan. It’s a new, more ambitious approach,” he told reporters Tuesday. The original transformation plan, introduced two years ago, had more of a focus on marketing and on making Esprit into a ‘superbrand.’ Martinez said that this new transformation plan, which is more about having the right product, is only about six months through and still in the very early stages.
 
As part of the cost-cutting program, which will be across the board, Martinez said that spending on marketing and store revamps will slow down. Growth “is more about doing our things right,” he explained. He said he would be willing to spend more on marketing once the operational changes were in place to improve the product.

 

Store revamps have also slowed and will be reintroduced in a cost efficient way, he explained. Esprit’s new “Lighthouse” store concept, which has been lauded by analysts, has needed some tweaking to be financially profitable, Martinez explained but is “finally working very well.”
 
Esprit’s weak results Tuesday were expected after the company’s profit warning earlier this year. CLSA analyst Aaron Fischer said that he does like what the company is saying about improving the business by improving the brand, products and stores but emphasized that “execution risk is still very high” and that Esprit “may or may not be successful.”
 
“Esprit is operating in an ultra competitive market,” Fischer said, citing strong global brands such as Hennes & Mauritz, Inditex’s Zara, and The Gap as well as strong local brands in various countries.
 
Martinez said he hopes to see an improvement in sales in 12 to 18 months, which Fischer sees as “reasonable” but the analyst expects the company’s earnings will remain weak for another two to three years as Esprit continues to invest in its business.