Esprit Holdings chief executive officer Jose Manuel Martínez Gutiérrez said it is unlikely that Hong Kong’s Financial Reporting Council will end up investigating his company’s accounting practices as the company posted a yearly loss of 3.68 billion Hong Kong dollars, or $477.41 million.
On Monday, a local shareholder activist David Webb said the chairman of the FRC, a former Esprit executive, has been temporarily replaced due to a conflict of interest, suggesting the council was investigating Esprit.
The FRC did not respond to requests for comment.
Martinez called the report “extremely damaging” — the stock took a 6.16 percent hit once it was released — but downplayed the likelihood of a probe materializing.
“The probability that Esprit is being investigated is relatively low but again, we don’t have any proper communication about it,” he said during a press conference.
“I personally think that it is a very serious matter that anyone can speculate and then you cannot get any clarity from the different party involved in the topic but it’s also misleading, I think, for investors that are reacting to speculation,” Gutiérrez said at the firm’s annual earnings briefing.
Esprit’s net loss for the year ended June 30 compared to a 210 million Hong Kong dollar ($27.1 million) profit in the year earlier period. Turnover fell 19.8 percent to 19.42 billion Hong Kong dollars or about $2.5 billion. The company posted an earnings before interest and taxes loss of 3.68 billion Hong Kong dollars, or $474.83 million, compared to a 361 million Hong Kong dollar ($46.60 million) profit.
Admitting that the results had missed the mark, the company said a number of factors led to the weakness, including an 8.8 percent reduction in total controlled space, a warmer-than-usual winter in Europe and a depreciation of the euro.
Esprit said it considered the streamlining of the supply chain essentially finished. The company has reduced the number of suppliers it uses and adjusted its country production base, moving into ideal country of origins for categories, while also significantly reducing the number of stockkeeping units to improve efficiency.
But it is not done shrinking its network, Martinez said, declining to give specifics. Esprit’s wholesale business was proving difficult as business at Chinese department stores had deteriorated faster than the company had originally expected two years ago.
Executives said Esprit did receive feedback of the new collections under the new vertical business model, which were released in February.
“September month-to-date, all the figures we had until yesterday are [confirmation] of this positive development,” Martinez said. “We are starting to see the benefits of the development and new products.”
From June onwards, he added, Esprit outperformed the broader retail sector in Germany, a key market which constitutes 46 percent of business.