Esprit blames weak euro and bad climate for further fall in revenues

Esprit Holdings, for its financial results for the 12 months ended June 30, 2015 said that the year was an exceptionally challenging one in which the group’s financial performance was adversely impacted by internal and external factors. The group reported a decline in turnover to 19,421 million Hong Kong dollars or 11.5 percent in local currency and 19.8 percent in Hong Kong dollar terms (2,505.9 million dollars).

Commenting on the Group’s financial performance, Thomas Tang, the Group Chief Financial Officer of Esprit, said, “Although the challenging market had considerable impact on our turnover, our gross margin remained stable and savings were achieved in most cost lines of our regular operations. With our priority on cash preservation over the past two years, the group is on a sound financial footing, with a healthy balance sheet that we intend to leverage to decisively execute the strategies that shall drive top line growth in the near future.”

Factors leading to disappointing results

The company said that the results were in negative mostly due to the reduction in total controlled space, exceptionally warm winter in Europe which placed pressure on sales and prices during the entire Autumn/Winter 2014 season; continuation of negative market development during the second half, weak collections performance until the introduction of the vertical products; and unfavourable exchange rate movements, especially the significant depreciation of the euro against the Hong Kong dollar.

Gross profit margin of 49.9 percent and recurring operating expenses down 1.2 percent in local currency and 10.3 percent in Hong Kong terms remained in line with the previous year level, but the lower sales resulted in operating deleverage and led to an operational loss. The bottom line EBIT loss of 3,683 million Hong Kong dollars (475.2 million dollars) was further aggravated by provisions and impairments related to the contraction of the business over the past two years.

Steps to reduce losses showing results

Product enhancement by introducing its new “Vertical Model” The past financial year was devoted to the implementation of vital part of the group’s strategic plan: the ‘transformation’ phase. During this phase, a vertically integrated business model was introduced within Esprit to enhance the speed and efficiency of product development and supply chain processes, and thereby significantly improving the design and value for money of the products.

The company was able to implement lean supply chain management (from over 350 to below 230 suppliers, category management teams, new merchandising model with buying and merchandising fully centralized, reduction in product range, seasonal product calendar from 12 monthly collections to 4 seasons fast-to-market product development and stock management optimization. The group has observed positive developments of these implementations in terms of product sales performance.

Following the introduction in February 2015 of the Spring/Summer 2015 collections, the first ones developed under the ‘Vertical Model’ retail turnover decline narrowed consistently over each subsequent quarter during FY14/15, sales of comparable retail stores recorded positive year-on-year growth of 4.1 percent in the last three months of June, July and August 2015, sales performance of Germany outperformed the market in each of the last three months, retail sales of Esprit Women divisions recorded 5.3percent year-on-year growth for the last three months; and The Trend Division representing 2.6 percent of group turnover), reported turnover growth of 29.7 percent in local currency in FY14/15.

Omnichannel model to improve sales

The company also developed it omnichannel model in order to optimize the selling of competitive products from the Vertical Model and to maximize the joint performance of all sales channels including offline and online, retail and wholesale.

Commenting on the company’s performance and way ahead, Jose Manuel Martínez Gutiérrez, the Group Chief Executive Officer of Esprit, said, “While I do regret that the results have missed the mark, I am convinced that last financial year was fundamental for our future as we successfully completed the most demanding phase of our strategic plan. The foundations of our vertical and omnichannel models are engrained in the organization and the encouraging retail performance in the last three months leads us to much confidence in our product and sales capabilities. With this confidence, we are entering the ‘growth’ phase of our plan.”

Growth expected from brand building and expansion plans

The group expects to see increase in productivity of the controlled spaces to be driven by enhanced products and channel operations. Additionally it plans to support with more intensive brand marketing and expansion efforts which may place pressure on profitability in the short term.

The group also intends to selectively pursue expansion opportunities in both existing and new markets, particularly in European countries where Esprit’s brand awareness is high but the penetration is presently limited. In Asia Pacific, the group’s emphasis will be on China as the key market for growth, with other potentially attractive apparel markets globally to be evaluated on a case by case basis over the longer term.