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Esprit Net Drops, Lags Estimates on Weak Europe Sales

Esprit Holdings Ltd., Asia’s third-biggest clothier by market value, posted a 21 percent drop in profit, missing analyst estimates, as sales declined in Europe.

Net income fell to HK$2.14 billion ($275 million) in the six months ended December from HK$2.7 billion a year earlier, missing some analysts’ estimates, as weak demand in Europe hurt Esprit’s wholesale business. Profit trailed the HK$2.3 billion median of five analyst estimates in a Bloomberg News survey.

Wholesale revenue, which includes transactions in department stores, slid 13 percent to HK$7.62 billion in the fiscal first half of Esprit, which competes against Hennes & Mauritz AB and Inditex SA’s Zara. While overall sales in China grew 5.4 percent to HK$1.4 billion, it wasn’t enough to offset declines in Europe, where the share of Esprit’s total revenue fell to 79 percent.

"Esprit’s management clearly have a lot more work to do," Matthew Marsden, a Hong Kong-based consumer analyst at Samsung Securities Co. who recommends buying the retailer’s stock, said by phone today. "For example, the same-store sales growth in China is barely positive at 0.5 percent -- this leaves much room for improvement."

Same-store or comparable sales strip out the effects of recently opened outlets.

Shares Decline

Esprit’s decline in wholesale revenue may narrow to a “single-digit” percentage in the second half of the year, Chief Financial Officer Chew Fook Aun said at a briefing today. The company is aiming for a “50-50 sales mix” between its wholesale and retail businesses in the long term, Chief Executive Officer Ronald van der Vis said at the same press conference.

Esprit fell 0.3 percent to HK$38.75 at the 4 p.m. close of trading in Hong Kong, extending its decline in the past 12 months to 32 percent. The stock rallied as much as 5 percent in afternoon trading after the company released its earnings announcement before resuming its slide.

"Esprit has turned the corner, at long last," said Marsden. "The wholesale division returned to growth in the second quarter of the 2011 fiscal year, which is the first time this business has grown revenue since June 2008."

‘Cautious’ Consumers

Wholesale revenue grew 3.2 percent in local currency terms during the three months ended December, Esprit said, driving overall sales. Still, the division, which contributed 43 percent to total sales, remains affected by “cautious consumer sentiment and spending” in core markets, the company said. “Our wholesale customers remain conservative with their pre-orders.”

Sales in the Asia-Pacific region surged 39 percent to HK$3 billion, boosted by the inclusion of China revenue after the clothier bought out its joint-venture partner in the world’s fastest-growing major economy. Esprit plans HK$1.3 billion in capital expenditure in the second half, more than double the investment in the first six months, as it expects to open about 70 directly managed stores while refurbishing old ones.

“With the acquisition of the remaining 51 percent equity interest in the former China joint venture, China is our new growth engine driving further expansion,” Esprit said.

China Earnings

China contributed HK$230 million in net profit, Chew said. Esprit wholly owns its Chinese business after paying HK$3.88 billion in 2009 to buy China Resources Enterprise Ltd.’s stake.

Esprit also said it asked some suppliers in Asia to quote prices and settle in U.S. dollars, rather than euros. The euro lost 8.7 percent against the Hong Kong dollar in Esprit’s fiscal first half, using the average exchange rate in the period against the rate the year before.

The retailer of casual clothing, accessories and cosmetics will pay an interim dividend of HK$1 a share, compared with 74 HK cents a year earlier, according to the statement.

Total sales fell 4.2 percent to HK$17.7 billion and operating margin narrowed to 14.9 percent from 18.2 percent. Earnings per share fell to HK$1.66, from HK$2.11.

Retail sales increased 3.3 percent to HK$9.96 billion, the company said, while retail selling space expanded 2.3 percent in the six-month period compared with a year earlier. Comparable store sales fell 1.5 percent globally.

Esprit’s sales in Europe fell 11 percent to HK$14 billion. H&M, Europe’s second-largest clothing retailer, also missed analysts’ estimates when it reported fiscal fourth-quarter earnings last month. H&M’s net income fell 11 percent to 5.49 billion kronor ($846 million) in the three months ended Nov. 30.

Esprit also announced Heinz Krogner resigned as non-executive chairman and director, citing his “intended pursuit of other personal commitments.” Hans-Joachim Korber, a former chief executive officer of Metro AG, will replace Krogner, the retailer said in its statement.

Susie and Doug Tompkins started Esprit in 1968 by selling clothes out of the back of a station wagon in San Francisco, according to the company’s website. The company’s transformation into a worldwide brand began three years later, when the couple met Hong Kong businessman Michael Ying, who was chairman from 1993 to 2006, when Krogner took over.

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