Esprit seeks to reassure with profit forecast; shares slide

HONG KONG Tue Sep 10, 2013 8:59am EDT

1 of 5. A man walks past an Esprit store in Hong Kong's central financial district September 15, 2011.

Credit: Reuters/Tyrone Siu

HONG KONG (Reuters) - Esprit Holdings (0330.HK) will return to profit this year on cost cutting and adequate provisions, its CEO said on Tuesday, disappointing investors who had hoped the Zara-brand veteran would do more to engineer the clothing retailer's $2.3 billion turnaround.

Chief Executive Jose Manuel Martinez GutiƩrrez said Esprit aimed to bring operating expenditure-to-net sales ratio to below 50 percent and reduce inventory levels by just over 10 percent, reassuring investors that the steeper-than-expected net loss for the year that ended in June was unlikely to recur.

Martinez, however, gave few details on how he planned to revive the brand's image or boost turnover in fiscal 2013/14.

Esprit shares, which were trading nearly 5 percent higher before the earnings announcement, closed down 7 percent, their biggest daily percentage fall in just under 11 months, in turnover that was the heaviest since mid-June. The benchmark Hong Kong index .HSI closed up 1 percent.

"The market had too much hope and too high hope on the performance," said Alex Wong, a director at Hong Kong-based brokerage Ample Finance Group.

"The result was not as bad as it looked," he added. Esprit reported its first annual net loss on Tuesday.

Investors had given Martinez a vote of confidence when he was appointed from Zara-owner Inditex (ITX.MC) last year, driving Esprit's stock to notch its biggest one-day gain in 14 years.

Esprit has been trying to revive its image since it reported a 98 percent drop in profit for the first half of 2011 and acknowledged the brand had "lost its soul".

The company is also struggling with sluggish demand in austerity-hit Europe, which accounts for about 80 percent of its revenue, and competition from Gap Inc (GPS.N) and Uniqlo, the flagship of Japan's Fast Retailing Co Ltd. (9983.T).

Martinez has so far shut down the company's North American operations and closed 16 stores, mainly in Europe, while maintaining its focus on China.

He also plans to slash by a third the time it takes for new products to hit the shelves by simplifying distribution, one of the hallmarks of his tenure at Inditex.

"We really should focus now on performance itself and we shouldn't expect to have any more exceptional provisions," Martinez told the briefing.

So far, investors have appeared to be willing to give Martinez time to carry on with his restructuring plans and analysts said he still had his work cut out for him.

Before Tuesday's fall, Esprit shares were up about 37 percent since his appointment was announced on August 7, 2012, nearly three times the percentage gain in the benchmark Hong Kong index during the same period.

"It's not easy to change into a Zara-style retail model from Esprit's existing one, which also comprises wholesale," said Ample Finance Group analyst Wong. "It needs to take quite some time to see the actual effect."

($1 = 7.7562 Hong Kong dollars)

(Editing by Anne Marie Roantree and Miral Fahmy)

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