Esprit New CEO Takes Helm Amid Disappointing Profit

Esprit Holdings Ltd. (330) welcomed its newest chief executive with a two-day stock decline and an analyst downgrade as the apparel retailer’s earnings missed estimates for the fifth straight year.

As Jose Manuel Martinez Gutierrez took control yesterday, the stock tumbled 7 percent and dropped as much 4.1 percent today. UOB Kay Hian Ltd. cut its rating on the stock to “sell” from “hold” after the retailer’s fiscal year profit of HK$873 million ($112.6 million) was below the HK$995.8 million average estimate of 13 analysts compiled by Bloomberg.

Martinez, a 42-year-old former Inditex SA (ITX) executive, must convince investors, skeptical after the slump in the stock and the departure of its chairman and chief executive that he has a plan to turn around declining sales in Europe and lure shoppers from competing brands such as Zara.

“We remain skeptical about the promises made and the hopes pinned on the transformation plan,” said Steven Leung, Hong Kong-based institutional sales director at UOB Kay Hian. “We aren’t sure if the new CEO will remain committed to the plan or what kind of strategy he’s going to adopt.”

Price Target

Goldman Sachs Group Inc. reduced its price target on the stock to HK$11 from HK$11.70, as JP Morgan Chase & Co. cut its target to HK$11.50 from HK$19.50.

Esprit shares fell 3.4 percent to HK$11.92 at 10.13 a.m. Hong Kong time. The benchmark Hang Seng Index rose 0.6 percent.

Martinez took the place vacated by Ronald Van der Vis, who announced his departure in June. Chairman Hans Joachim Koerber quit a day after Van der Vis. The departure of both executives had raised doubts over succession as Esprit struggles to restructure its business.

Van der Vis, hired in 2009, last year laid out a turnaround plan that included makeovers of existing stores and new ones in China.

Esprit’s transformation plan is “ambitious,” Martinez said at a press conference in Hong Kong yesterday. “My priority number one is not to disturb the company and to make sure this transition is smooth.”

“I’m fully agreed with the fundamentals of the transformation plan,” he said. “So whatever changes or whatever directions we take, it’s going to be decided by the team over time.”

Sales Declines

Shares of Esprit surged the most since 1998 on Aug. 7 after the appointment of Martinez on optimism the executive who ran distribution and operations for the owner of Zara stores will be able to replicate some of Inditex’s success and help Esprit recover from a three-year profit decline.

Esprit reported sales of HK$30.2 billion in the 12 months to June 30, a decline of 11 percent, according to a statement to the Hong Kong Stock Exchange yesterday. It booked a HK$696 million write-back on a provision made for store closures in North America. Marketing expenses rose to HK$1.6 billion from HK$984 million.

Net income in the second half was HK$318 million, compared with a loss of HK$2.06 billion a year earlier, according to data compiled by Bloomberg.

Sales in Europe dropped 11 percent to HK$23.7 billion in the year just ended, with Germany, Esprit’s biggest market, falling 9 percent. Europe accounted for 79 percent of sales last year.

Esprit’s capital expenditure is expected to reach HK$1.5 billion in the current financial year, compared with HK$1.4 billion in the year just ended. Earnings per share were 68 Hong Kong cents, compared with 6 Hong Kong cents a year earlier.

The Hong Kong-traded apparel company was established in 1968 in San Francisco, when Susie and Doug Tompkins started selling clothes out of the back of their station wagon.

To contact the reporter on this story: Vinicy Chan in Hong Kong at vchan91@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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