UPDATE 2-Esprit looks to China as it swings to H1 profit amid turnaround

Fri Feb 21, 2014 5:52am EST

* H1 net profit HK$95 mln vs HK$465 mln loss previously

* H2 business environment remains challenging - company

* Esprit hires China veteran as managing director (Adds details on China business, executive comments)

HONG KONG, Feb 21 (Reuters) - Esprit Holdings Ltd swung to its first profit in a year thanks to a turnaround plan that its chief executive said on Friday would also seek to stem losses in China.

The clothing retailer has struggled in the world's second-largest economy, where it shut 38 directly managed stores last year as it grappled with high rents, stalling sales and wholesalers with too much inventory.

It now wants mainland China, which accounts for less than 8 percent of turnover, to become a priority. Europe remains Esprit's biggest market.

"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 reporters during an earnings briefing. "There is no way we can lose the opportunity for Esprit in China."

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.

The company said it has hired Bernard Mah, who spent 17 years as chairman of Hong Kong-listed Giordano International Ltd's China operations, to run its China business. It is also allowing wholesalers to return some unsold goods on a case-by-case basis.

"We know our results for China are not satisfactory and we are strengthening our management at all levels," Chief Financial Officer Thomas Tang said.

Esprit said it made a net profit of HK$95 million ($12.25 million) in the six months ended Dec. 31, compared with a loss of HK$465 million for the same period a year earlier. It last made a profit in the period ending June 2012.

TURNAROUND

Esprit has been restructuring its businesses globally over the past year in a bid to return to profitability. The early gains have come from cost cuts but whether the company remains profitable will depend on its product line.

Chief Executive Martinez, who joined Esprit from rival Inditex SA brand Zara in 2012, has been fighting to revamp the retailer's business model to match Zara's successful fast-fashion model.

Martinez has hired other Zara veterans and unveiled technology and distribution upgrades that will halve the time it takes to get clothes designed, manufactured and in stores.

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. It still had 59 stores to close globally as of the first-half.

The retailer said it expects a further decline in turnover, which fell to HK$12.81 billion in the first half, down from HK$13.55 billion in the same period last year.

Esprit shares closed up 0.7 percent on Friday after see-sawing in and out of negative territory for most of the day. The shares have lost about 4 percent this year compared with a roughly 3.5 percent decline in the benchmark Hang Seng Index. ($1 = 7.7556 Hong Kong dollars) (Reporting by Clare Baldwin and Anne Marie Roantree; Editing by Miral Fahmy)

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