Esprit back to black but missed estimates require caution

ANALYSIS_ Esprit Holdings Ltd swung to its first profit in a year, leaving the red behind yet missing the market expectations. The turnaround plan will also help the company stem losses in China. The Hong Kong listed fashion retailer will remain cautious on the outlook for the coming

months though.

Fashion retailer Esprit Holdings Ltd. returned to profitability for their current fiscal year's first half - six months ended in December - due to aggressive cost-cutting, but warned of an uncertain outlook this year as it posted another round of earnings that fell short of analysts' expectations.

"It will be more difficult to be profitable" in the January-to-June period, said Esprit Chief Executive Jose Manuel Martinez Gutierrez, noting that retail performance historically is weaker in the first half of the calendar year. It still had 59 stores to close globally as of the first-half, the company reminded.

Esprit,

which forecast a first-half profit last month, also repeated a warning that the second half of the year is typically weaker and that the business environment remains challenging. The retailer expects a further decline in turnover, which fell to 12.81 billion Hong Kong dollars in the first half, behind the 13.55 Hong Kong dollars billion the company noted in the same period last year.

Esprit shares closed up 0.7 percent on Friday after an agitated session. The stock has shredded almost 4 percent of its value this year compared with a 3.5 percent decline in the benchmark Hang Seng Index, highlighted Reuters.

Worth noting that in the fiscal year ended in June 2013, Esprit posted its first full-year loss since listing in Hong Kong in 1993, with results falling short of analysts' estimates for the sixth consecutive year, reported 'MarketWatch'.

Commenting the news in a report to investors, Aaron Fischer an analyst with CLSA Asia-Pacific Markets, said that the "execution risk of the transformation remains high". "With slower growth likely in the second half and limited room for further cost cutting, fiscal-year 2014 will likely be a marginal break-even year for Esprit," added Fischer, who has a 'sell' rating on Esprit.

Esprit cautious on future: China remains key for H2

Esprit's China turnover fell 24.5 percent in the first half of the year as it lost more than a quarter of its wholesaling space and 12.6 percent of its retail space. "It's important that we are clear with our partners in China that we are fully committed to this market," Chief Executive Jose Manuel Martinez Gutierrez told media during an earnings briefing on Friday. "There is no way we can lose the opportunity for Esprit in China."

The clothing retailer has struggled within that market, where it had to close 38 directly managed stores last year due to pressing costs. It now wants mainland China, which accounts for less than 8 percent of turnover, to become a priority, while Europe will remain Esprit's biggest market.

Aimed to conquer the world second largest economy, Esprit has announced the hire of Bernard Mah, who spent 17 years as chairman of Hong Kong-listed Giordano International Ltd's China operations, to run its China business. "We know our results for China are not satisfactory and we are strengthening our management at all levels," Chief Financial Officer Thomas Tang supported Martinez views.

Esprit said it made a net profit of 95 million Hong Kong dollars in the six months to Dec. 31, compared with a loss of 465 million Hong Kong dollars for the same period a year earlier. It last made a profit in the period ending June 2012.