Esprit Holdings LTD. swung to a net profit for the fiscal year as the company reduced costs and stabilized sales in Europe, its largest market.
Net profit for the 12-month period ended June 30 totaled 210 million Hong Kong dollars, or $27.1 million, compared with a loss of 4.38 billion Hong Kong dollars, or $565 million, a year earlier.
Revenue declined 6.5 percent to 24.2 billion Hong Kong dollars, or $3.1 billion, as a result of store closures, the company said. The Hong Kong dollar is pegged to the U.S. dollar. Revenue declined 9.9 percent in local currency terms.
Esprit has been closing unprofitable stores; its controlled selling space declined by 10.7 percent during the fiscal year. Notably, while Esprit pointed to stabilizing sales in Europe, it said challenges remain in Asia Pacific.
José Manuel Martinez Gutierrez, the group chief executive officer, said Tuesday he was pleased with the results and believes the company has “turned a corner” in its road to recovery.
Esprit has been in the midst of an ambitious, multiyear transformation plan that started in 2011. Since taking the helm in September 2012, Gutierrez has been shifting the company’s transformation plan toward more operational changes.
“It’s really about fixing the product and not about the marketing. Three years ago, we thought that we needed a massive investment in advertising and we used the best models in the world and we almost killed the company,” he said.
Gutierrez, a former McKinsey consultant who spent nine years at Inditex before joining Esprit, has been working to overhaul the company’s business model to reduce lead time and become more efficient.
In order to create a more vertical business, Gutierrez said he’s had to implement changes at every stage of the business, including product development, merchandising, supply chain and stock management. The new vertical business model was implemented in July and “though the new model is in its early stages and will need further refinement, the initial feedback from our partners has been positive,” he said.
Plans to refurbish stores have been moving along more slowly than originally anticipated as Gutierrez said initial results were not up to expectations. During the fiscal year, Esprit cut its investments in store refurbishment by 74 percent. About 38 percent of Esprit’s retail space has been updated. After revising the store concept, results have improved and the ceo said more store refurbishments are planned, but that rollout would continue to be cautious.
Sales in Europe have been stabilizing. Excluding store closures, revenue in Europe dropped 1.8 percent in Hong Kong dollar terms and 6.3 percent in local currency, roughly in line with an 8.9 percent reduction in net sales area.
By contrast, China and Asia Pacific, generally seen as a growth market, has been weak for Esprit. The company has been working on closing unprofitable stores and reducing old inventory in the wholesale channel.
“In China, for many years we had little competition, so we could be happy and have big margins. Now we have more competitors than we used to have. That’s why the old Esprit cannot compete in China,” Gutierrez said.
China also has its own unique challenges, the ceo noted. Like other apparel manufacturers, Esprit has been shifting its apparel production to lower-cost markets such as Indonesia, Vietnam and Cambodia. That means goods either have to be imported into China or produced separately in China, both of which are challenging. Esprit has been opting for the latter solution, but has been struggling with delays and later shipments.
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