It has been a sour year for Esprit, which has finally opted for retreatment to heal its wounds at home. The Hong Kong based company faces its biggest drop since 1993 and its shares fell as much as 24% in a day coined as the one Esprit lost its soul by international analysts.
“We’re paying the price now” for having focused on short- term gains, Chief Executive Officer Ronald Van der Vis said in an interview late yesterday. “We had lost sight of the customer,” he said. “We started to neglect the brand.”
Esprit slumped as much as 24 percent, the biggest intraday slide in 14 years, and has lost about 36 percent since Hong Kong’s biggest listed clothing chain yesterday reported a 98 percent drop in annual profit. It has been its biggest two-day drop since listing in 1993 as at least seven brokerages downgraded the stock after the clothing retailer said the brand has “lost its soul.” “The market is worried about Esprit’s profitability in the next two years,” Hayman Chiu, an analyst with Cinda International Holding Ltd in Hong Kong said in a phone interview today. “The divestment of North American business may not help much.”
"There is definitely some liquidation of long positions, particularly from the major funds," said to Reuters Jackson Wong, vice president for equity sales at Tanrich Securities. "This stock has been on a lot of people's sell list even before the results yesterday." Esprit was also the biggest loser among Hang Seng Index components for the year, down nearly 70 percent. The losses on Thursday and Friday marked its worst two-day drop since October 1997. In the same vein, CLSA said in a research note that it had cut its earnings estimates for Esprit by 52-83 percent for the next two years and slashed its price target by 47 percent to HK$12.50 from HK$23.50. It downgraded the stock to sell from underperform.
The casual clothing maker’s revenue fell for the third year in a row in Europe, where it made 79.1 percent of sales. Esprit will accelerate expansion in China while reviving growth in other main markets such including Germany and France, where it’s shutting stores, and selling its unprofitable North American operations, Van der Vis said.
In the probably bitterest communication to investors the company has ever had to make, Esprit yesterday said it plans to close 80 outlets, including 24 in Germany and 12 in France. “The brand has gradually lost its soul over the past few years,” Esprit said in its filing. “The heritage of the brand has been neglected and the company lost its customer focus.” “Management’s guidance for an operating profit margin of 1 percent to 2 percent represents the biggest negative surprise,” Aaron Fischer and Mariana Kou, analysts for CLSA, said in a note to clients. “The low operating profit margin implies close to zero net profit for 2012 and greatly reduces the potential for a reasonable dividend yield.”
Esprit will exit Spain, Denmark and Sweden completely and focus its efforts on Asian markets, especially China, as part of a sweeping transformation to restore its financial health, the Hong Kong-listed company said. The company did not specify however how its decision to divest its North American operations would affect its 93 stores and outlets in the United States and Canada, saying they could either be closed or sold to licensees.
But this will not be a definitive withdraw: the Asian retailer will be focusing on growing stronger back at home and it is hiring a manager for China as it plans to more than double sales in the world’s most-populous nation in four years, Van der Vis said. The new executive’s goal is to meet Esprit’s stated targets of HK$6 billion sales in China, with 1,900 sales outlets, in the fiscal year that ends June 2015.