Fashion retailer Esprit warns of substantial full-year net loss

Fashion retailer Esprit Holdings says it expects to post a “substantial [net] loss” for the 12 months to June 30 due to huge asset write-offs, and it also expects to be in the red at the operating level due largely to weak sales in Europe and on the mainland.

While chief executive Jose Manuel Martinez told reporters on Monday that restructuring of its mainland operation has been completed and is “ready for the next [period of] growth,” the profit warning still represents a major disappointment to analysts.

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Prior to the loss warning, the firm was projected to post a net profit of HK$96 million for the 12 months to June 30, according to the average estimate of 11 analysts polled by Thomson Reuters.

Net profit for the six months to December was HK$47 million, down from HK$95 million a year earlier, while operating profit plunged 85 per cent to HK$37 million and turnover dropped 16.3 per cent to HK$10.72 billion.

Sales for the three months to March 31 fell 25.5 per cent year on year, as the negative impact from an unusually warm European winter spilled over to early this year and big discounts had to be offered to clear stock.

“Many analysts did not expect a loss, especially at the operating level, even though some asset provisions were expected due to store closures,” said an analyst at an Asian brokerage who did not want to be identified. “Its mainland operation hadn’t been well ever since it was acquired.”

Esprit bought out its mainland joint-venture partner China Resources Enterprise’s stake for HK$3.88 billion in late 2009.

Esprit said in a filing to Hong Kong’s stock exchange on Monday that substantial sales declines stemming from store closures and inventory clearance meant it expects to book HK$2.5 billion to HK$2.7 billion in goodwill impairment for the mainland operation, a non-cash accounting loss it said will not affect its cash position.

It also expects to book HK$440 million to HK$470 million in asset provisions and impairments related to the closure of its directly managed stores.

Despite weakening mainland economic growth, Martinez said the company is poised for growth there after closing loss-making shops and a sharper focus on profits for the remaining stores, adding that sales of its spring collection have improved year on year in Asia and Europe.

The firm derived 83.2 per cent of its sales in the nine months to December 31 from Europe, and 16.2 per cent from the Asia-Pacific region.