David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

What's been the world's best-performing major retail stock so far this quarter, after Uniqlo owner Fast Retailing? Gap? H&M?

Based on Bloomberg Intelligence's index of specialty apparel stores, it's Esprit. Remember them?

Back in Fashion
Share price change of major global apparel retailers, September quarter-to-date
Source: Bloomberg
Note: All changes in local-currency terms.

The Hong Kong-based chain looked like it had the world at its feet back in 2007. Sales were on track for their 15th consecutive year of double-digit growth, net income had risen fivefold in as many years and the company's enterprise value was more than 17 times forecast Ebitda -- well above H&M, Inditex and Fast Retailing.

How the mighty have fallen. Esprit's shares are now down 94 percent from their peak. Ten years ago, Bloomberg had recommendations on the stock from 22 equity analysts, with 19 rating it a buy. Nowadays, only seven are paying attention, and six of them suggest selling out.

For all the doom and gloom, there are actually signs that Esprit's season in hell is nearing an end. Same-store sales, which have been declining for most of the past decade, grew by 8.1 percent in the 12 months through June, the company said in annual results Tuesday.

Excluding exceptional items, Ebit of the underlying operations came in at a HK$572 million ($73.7 million) loss, beating all six analyst estimates compiled by Bloomberg. Net profit was HK$21 million, compared with a net loss of HK$3.7 billion last year.

Jose Manuel Martinez Gutierrez, who ran distribution and operations for Zara parent Inditex before being appointed Esprit's chief executive in 2012, has conducted some brutal surgery to get to this point. The directly managed store network has shrunk by a third from its peak in 2011, and the number of outlets carrying wholesale stock has dropped by more than half. Revenue of HK$17.8 billion for the 12 months to June 30 is down more than 50 percent from fiscal 2008.

Small Is Beautiful
Esprit's distribution network has shrunk, and shrunk, and shrunk
Source: Bloomberg

All that comes at a cost: Over the past six years, there have been HK$6.1 billion of impairments to assets and goodwill and HK$2 billion of costs and charges associated with store closures -- more than enough to account for Esprit's HK$6.9 billion of net losses during the period.

Where Esprit goes from here largely comes down to whether you think that decade of decline has bottomed out or has further to run.

Operationally, Esprit hasn't got much to show for Martinez's four years of importing Zara's fast-fashion expertise. Rising inventory days mean that its products are actually hanging around unsold for longer than when he joined -- a poor use of capital, and a sign stock isn't exactly flying off the shelves.

Not So Fast
Esprit's inventory days have been rising in recent years
Source: Bloomberg

A conservative balance sheet, with HK$5.3 billion in net cash, at least means Esprit should avoid the fate of retailers that end up overwhelmed by their debt. But conservatism is precisely the problem for a brand that's tried, and failed, to recover its old cachet for many years.

As bankrupted retailers Aeropostale and Quiksilver would know, once you've lost it in the fashion world it can be difficult to get it back. Esprit is aiming at more of a thirtysomething demographic than H&M and Zara, but the trick with targeting older shoppers is to keep the brand exciting enough that they don't feel old.

That doesn't seem to be working, yet. Take Instagram, an increasingly popular channel for apparel stores to market their wares. H&M has 150 followers for every person signed up to Esprit's page. Esprit doesn't even attract the attention levels boasted by more middle-aged-focused retailers such as Marks & Spencer or the utilitarian Uniqlo.

Reining in the bloat of the late 2000s has given Esprit a respectable base from which to start growing. But if Martinez is to really turn things around, he'll need to ensure Esprit wins at the popularity contest as well.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Bloomberg doesn't receive estimates from all equity analysts. Esprit's website lists nine analysts as covering the stock, of whom eight have written on the company within the past 12 months.

  2. Esprit's inventory turnover for the 12 months to June was 115 days, an increase of 11 days as compared to a year ago, primarily due to its "strategic decision to increase the purchase of inventory to push retail sales growth" during the period.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Katrina Nicholas at