Aug. 8 (Bloomberg) -- Inditex SA has become the global leader of fast fashion by getting clothing inspired by the runway to its racks in a matter of weeks. Esprit Holdings Ltd., apparently deciding the best way out of a slump was to emulate that strategy, yesterday snagged a key Inditex executive.
Esprit shares surged 28 percent yesterday, the most since 1998, on news that the company had hired Jose Manuel Martinez Gutierrez as its new chief executive officer. Investors were wagering that Martinez, 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.
The speed with which Inditex introduces new merchandise in response to fashion trends drove profit up 12 percent last year as it expanded faster than Esprit, Hennes & Mauritz AB and Gap Inc. Esprit, by contrast, reported a 74 percent drop in first-half profit and in June announced the departures of CEO Ronald Van der Vis and Chairman Hans-Joachim Koerber within 24 hours of each other.
“People working at Inditex are associated with a success story,” said Alberto Roldan, an analyst who covers Inditex at Inverseguros Sociedad Valores y Bolsa SA in Madrid. Martinez “is bringing ideas and development plans that he can implement at the company.”
It may still take “a long time” for Esprit to turn around its business, according to Steven Leung, a Hong Kong-based director at UoB Kay Hian Ltd. Esprit shares dropped 12 percent to HK$11.20 at the 4 p.m. close in today in Hong Kong, giving up some of the previous day’s gains.
Martinez, 42, has worked in investment banking and spent eight years at consultant McKinsey & Co. At Inditex, he led efforts to streamline the supply chain and headed Zara in Scandinavia.
“Martinez will use his experience in supply-chain management to improve the delivery time-lag at Esprit,” said Paul Cheng, vice chairman of Esprit. “We used to launch new products every season, but now we may need to move quicker.”
In June, Inditex reported a 30 percent gain in first-quarter profit, beating analyst estimates. The retailer’s success is reflected in the rising fortune of Amancio Ortega, its septuagenarian founder who this week bumped Warren Buffett from his perch as the world’s third-richest person. The 76-year-old Spanish tycoon’s fortune climbed by $1.6 billion to $46.6 billion on Aug. 6, according to the Bloomberg Billionaires Index, as Inditex stock rose to a record.
Esprit’s revenue growth slowed to 0.1 percent in the year ended June, from 26 percent in 2008, according to data compiled by Bloomberg. Inditex’s sales increased 10 percent in the year ended January, topping H&M’s 1.4 percent gain for the year to November and Gap’s 0.8 percent drop in the year ended January.
Zara, the main Inditex brand, was a pioneer of fast-fashion and has sought to reproduce designer looks at affordable price.
“It is certainly a blow to Inditex to lose one of its top execs to a large competitor, but they have enough experience and expertise to continue growing,” said Magdalena Kondej, head of apparel research at Euromonitor International.
Inditex shares jumped 1.8 percent to a record high of 90.60 euros in Madrid yesterday. The company declined to comment on Martinez’s departure.
Esprit’s succession plan had been unclear after Van der Vis quit June 12 and the company reported the departure of Koerber a day later. The apparel maker’s stock plunged 22 percent in Hong Kong on June 13. Those departures came after the resignation in December of Chief Financial Officer Chew Fook Aun. Van der Vis pledged to stay in the post for as long as a year after resigning.
The Hong Kong-traded company was born in 1968 in San Francisco, when Susie and Doug Tompkins started selling clothes out of the back of their station wagon. As the brand took off, sales topped $100 million in 1978 and the company formed international partnerships in Hong Kong and Germany were formed.
Esprit in early 2009 said first-half profit fell for the first time in more than a decade because of the recession in Europe, where it made four-fifths of its sales.
Van der Vis, hired in 2009 to revive Esprit, last year laid out a turnaround plan that included makeovers of existing stores and new ones in China. In an investor presentation last year, the company said it planned to spend more than HK$18 billion ($2.3 billion) over four years to revive its brand through more marketing and a bigger Chinese presence.
Same-store sales have recently shown some improvement. Revenue at outlets open at least a year increased 0.5 percent in the three months ended in March after dropping 4.6 percent in the six months to December 31.
The appointment of Martinez reduces the uncertainty for investors, said Mohan Singh, an analyst at Citic Securities, who raised his recommendation on Esprit shares to buy from sell in a note to clients.
“Investor concerns,” Singh said, “about the strategic leadership of the company will now be lifted.”