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Esprit to Focus on Cost Cuts, Improving Profitability

May 15 (Bloomberg) -- Esprit Holdings Ltd., the Hong Kong-based apparel retailer that last year lost two top executives, said it will focus on curbing operating costs and improving profitability in the next six months to 12 months.

The brand aims to improve its business and distribution by cutting money-losing retail stores, unproductive product lines, unprofitable wholesale business and exiting countries where it’s incurring losses, Chief Executive Officer Jose Manuel Martinez Gutierrez said on a webcast yesterday. The company also targets keeping operational expenses below 50 percent of sales, he said.

Esprit this month forecast a “substantial” annual loss on store closures and a drop in the value of goodwill. The clothier has invested in advertising and store upgrades as it faces competition from rivals including Hennes & Mauritz AB, Fast Retailing Co. and Inditex SA’s Zara.

Esprit closed 5.8 percent higher at HK$11.28, the biggest gain since Nov. 15. The benchmark Hang Seng index rose 0.5 percent.

The company’s “strategic plan seems more sensible now,” Vineet Sharma, a Hong Kong-based analyst at Barclays Plc. wrote in a research note dated May 14.

“There seems to be a substantial change in approach here, with plans to cut spending, new store openings, and a complete overhaul of overheads to adjust to lower revenue run rates,” said Sharma, who has an equivalent of a sell rating on the stock with a price target of HK$9.

Further Fall

The clothing company expects a further fall in sales in the year ending June 2014 as it shuts more stores and the business to start recovering over fiscal 2015, Martinez said.

Saving targets and other growth projections laid out under a transformation plan announced in 2011 are “no longer applicable,” he said. The company may not save HK$1 billion ($129 million) annually by June 2015 as previously planned. The 2011 plan was rolled out by the company’s previous CEO Ronald Van der Vis.

Sharma, the Barclays analyst, said it’s too early to buy the stock and revenue will likely decline for at least a further 12 months to 15 months.

Esprit lost two executives in 48 hours in June. Former Chairman Hans Joachim Koerber resigned a day after then-Chief Executive Officer Van der Vis quit. The departures fueled doubt over the company’s ability to see its transformation plan through. Van der Vis was replaced by Martinez.

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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