Esprit Slumps as Analysts Downgrade Clothing Retailer That ‘Lost Its Soul’

Esprit Holdings Ltd. (330) plunged the most in more than 13 years as at least seven brokerages downgraded the stock after the clothing retailer said its brand had “lost its soul.”

Esprit plummeted 19 percent, the most since January 1998, and has slumped about 33 percent since Hong Kong’s biggest listed clothing chain yesterday reported a 98 percent drop in annual profit. The stock’s rating was cut by brokerages including UBS AG, Barclays Capital and Credit Suisse Group AG.

“We’re paying the price now” for having focused on short- term gains, Chief Executive Officer Ronald Van der Vis said in an interview late yesterday. “We had lost sight of the customer. We started to neglect the brand.”

The casual clothing maker’s revenue fell for the third year in a row in Europe, where it made 79 percent of sales. Esprit will accelerate expansion in China, revive earnings growth in other main markets including Germany and France, where it’s shutting stores, and sell its unprofitable North American operations, Van der Vis said.

“Esprit’s products are no longer trendy and fashionable,” Gabriel Chan, an analyst at Credit Suisse in Hong Kong, who cut Esprit from “neutral” to “underperform,” said in an interview today. “What Esprit really needs to do is to improve products and adjust its price points.”

Europe’s Economy

Net income dropped to HK$79 million ($10 million) in the year through June from HK$4.23 billion in the previous period, the third consecutive annual decline. Profit excluding exceptional items fell 30 percent to HK$2.35 billion.

Esprit declined HK$2.86 to HK$12.22 at the 4 p.m. close of trading in Hong Kong, extending its retreat this year to 67 percent.

The euro-area economy may come “close to standstill at year-end,” the European Union said yesterday, cutting its growth forecasts for the second half to reflect a worsening outlook on the sovereign-debt crisis.

“The recovery pace was slower than expected, especially in Europe, as consumer spending and sentiment was negatively impacted by rising inflation and austerity measures,” the Hong Kong-based company said in its earnings statement yesterday.

Zara, H&M

Esprit yesterday said it plans to close 80 outlets, including 24 in Germany and 12 in France.

“The brand has gradually lost its soul over the past few years,” Esprit said in its filing yesterday. “The heritage of the brand has been neglected and the company lost its customer focus.”

Esprit is facing increased competition from Inditex SA (ITX)’s Zara and Hennes & Mauritz AB (HMB)’s H&M. Inditex’s fiscal first- quarter net income rose 10 percent to 332 million euros ($458 million), beating analysts’ estimates, as it added new stores. Hennes & Mauritz yesterday said August sales were better than analysts anticipated.

“The market is worried about Esprit’s profitability in the next two years,” Hayman Chiu, an analyst with Cinda International Holding Ltd. in Hong Kong said in a phone interview today. “The divestment of North American business may not help much.”

China Expansion

The clothing chain forecast an operating profit margin of 1 percent to 2 percent for the year ending June 2012. That “implies close to zero net profit for 2012 and greatly reduces the potential for a reasonable dividend yield,” said Aaron Fischer and Mariana Kou, analysts for CLSA Asia-Pacific Markets who recommend selling the stock.

Esprit is hiring a manager for China as it plans to more than double sales in the world’s most-populous nation in four years, Van der Vis said. The new executive’s goal is to meet Esprit’s stated targets of HK$6 billion sales in China, with 1,900 sales outlets, in the fiscal year that ends June 2015.

Sales in China for Esprit more than tripled to HK$2.68 billion in the fiscal year through June, accounting for 7.9 percent of total revenue, which was little changed at HK$33.8 billion.

Esprit, which hired the brand director and creative director of Hennes & Mauritz AB’s H&M to rejuvenate its fashions, plans to spend HK$6.8 billion on branding over the next four years. It will focus its efforts in Germany, France, Belgium, the Netherlands and China, according to a company presentation.

Designers in Paris

Van der Vis is setting up a team of designers in Paris to be “closer to the pulse of fashion” and said he also wants a design team in China.

“We became too safe and boring,” Van der Vis said in an interview yesterday, referring to Esprit’s designs.

Esprit plans to spend HK$6.8 billion on branding over the next four years, focusing its efforts in Germany, France, Belgium, the Netherlands and China, according to a company presentation.

“This plan is going to take considerable time and significant investment to execute,” Erica Poon Werkun, an analyst with UBS said in a note to clients. “Considerable patience and faith are needed to support Esprit share price in the near term, which we believe can be rather much to ask for, amid volatile macro conditions.”

The retailer that started in California more than 40 years ago is in talks to sell its operations in U.S. and Canada, which had a full-year operating loss of HK$410 million. Esprit may buy the business back in five to seven years, Van der Vis said, declining to identify who the company is in talks with.

“China is our future, not North America,” he said.

Esprit had annual sales growth in its 15 fiscal years through June 2008, with revenue growing 48-fold in the period. The stock’s record closing price of HK$127.744 was 66 times its offer price in 1993.

“My journey now is to do things right in the long term,” Van der Vis said. “I’m not prepared to do anything to please anybody short term. We did that for too long.”

To contact the editor responsible for this story: Frank Longid at flongid@bloomberg.net

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