Esprit Sees Return to Profit After Cutting Operation Costs

Esprit Holdings Ltd., the clothing retailer rebuilding its brand, forecast a return to profit in the six months ended December after cutting costs.

Esprit expects to post a “slight profit” for its fiscal first half, compared with a loss in the same period a year ago, it said in a filing today. Business during the second half is normally weaker, it said. The shares surged as much as 5.7 percent in early Hong Kong trading.

The casual clothing retailer in September predicted a return to profitability in the fiscal year ending June, after reporting its first annual loss since a 1993 listing amid a revenue slump and competition from Inditex SA’s Zara and Hennes & Mauritz AB. The clothier has cut money-losing retail stores, some product lines, unprofitable wholesale business and is exiting countries where it had been losing money.

“This is very positive for the company,” Chris Zee, a Hong Kong-based retail analyst at HSBC Holdings Plc, said in a phone interview. He estimated Esprit profit at HK$70 million ($9 million) to HK$100 million for the first half. The clothier posted a loss of HK$465 million in the period a year earlier, according to data compiled by Bloomberg.

The company said its forecast profit is largely because of the reductions in operating expenses.

Challenging Environment

Esprit rose 1.2 percent to HK$15.88 as of the midday break in Hong Kong trading.

“The operating environment remains challenging,” Esprit said in today’s statement. “The financial performance of the group in the second half of fiscal 2013/2014 remains uncertain.”

There are “little signs” that revenue will rebound before July to December this year, Vineet Sharma, Hong Kong-based analyst at Barclays Plc wrote in a note to clients.

Weaker consumer demand in Europe, the recession-hit region that accounts for more than 78 percent of sales, has led to a 19 percent decline in revenue to HK$13.6 billion in the six months ended Dec. 31 last year.

Esprit has to keep track of consumer sentiment in Europe, especially Germany and France, Tanuj Shori, a Hong Kong-based analyst at Nomura said in a phone interview. Unemployment rate in the euro area has been stuck at 12.1 percent since April.

Last year, the departure of two top executives- former Chairman Hans Joachim Koerber and then-Chief Executive Officer Ronald Van der Vis- fueled doubt over Esprit’s ability to see its transformation plan through.

Revenue Focus

“Their cost cutting measures are good, but eventually they have to focus on boosting revenue,” Shori said. “It really depends on how the management executes their plan.”

Esprit has appointed former Zara executive Rafael Pastor Espuch as the new chief product officer last year, according to a statement in October. Inditex SA, a Spanish clothes maker, employed Esprit Chief Executive Officer Jose Manuel Martinez Gutierrez before he switched jobs in 2012.

Esprit had its highest annual profit, HK$6.45 billion, in the fiscal year ended June 2008, according to data compiled by Bloomberg. The company in 2011 reported profit that fell 98 percent and said its brand had “lost its soul over the past few years.”