Has Esprit lost its soul?

Once a high street brand to be reckoned with, Esprit has lost its lustre, delivering marginal product season after season at a time when consumers needed to be inspired. When all of a company's efforts and finances are being channeled into

 global expansion and restructuring, it is no wonder its product suffers. While Esprit remains Hong Kong’s largest listed retailer, it's full-year net profit plunged 98 per cent.

The group, which has endured season after season of challenge said it would divest its North American operations and close 80 unprofitable stores globally, including its retail businesses in Denmark, Sweden and Spain.

The costs of restructuring were compounded by margin pressure from rising wage and material costs, the company said. Shares in the group are now down 72.9 per cent this year.

Founded in the 1960s in California, Esprit has been hit by falling demand in Europe, its main market, and has had difficulties breaking into mainland China. The group has also faced increasing competition from the likes of Sweden’s H&M and Spain’s Zara globally.

“The brand has gradually lost its soul over the past few years,” the company said on Thursday. Esprit is in the midst of an ambitious plan to overhaul its stores, change its merchandise and expand its footprint – particularly in China. Between now and 2015, it plans to invest HK$18bn in the company and nearly double the number of places shoppers can buy Esprit merchandise on the mainland to 1,900 from 1,000.

Ronald Van der Vis, chief executive, said on Thursday that Esprit needed to upgrade the quality and design of its merchandise even at the cost of tighter margins. “The transformation plan is not a facelift,” said Mr Van der Vis.

To adapt its merchandise to the Chinese market – where analysts say it is perceived as too expensive and not as fashionable as competitors – he said Esprit would open a design hub on the mainland.

Yet the cost of overhaul, while necessary to boost the company’s long-term prospects, will dramatically squeeze operating profits in the near term, said Aaron Fischer, a consumer goods analyst at CLSA in Hong Kong.

The company said its operating profit margin next year would be 1 to 2 per cent and its turnover would fall 3 to 5 per cent because it is divesting its North American stores. It expects those margins to rebound to 15 per cent after its overhaul finishing in 2015

“What they’re doing is exactly the right thing,” said Mr Fischer. However, given the level of investment required, “the earnings recovery is going to be significantly worse than even the most bearish analysts expected, which was us.”

Image: Esprit AW11
Source: FT©