Esprit Holdings Ltd., the Hong Kong- based clothing retailer that derives 83 percent of its sales from Europe, plans to expand its operations to 400 Chinese cities as revenue from the continent declines.
Mainland China Esprit stores will increase 83 percent to 1,700 within five years to double the company's sales because the world's most-populous nation "represents the biggest growth opportunity," it said in a statement today.
Esprit fell the most in three months in Hong Kong trading today after reporting an 11 percent drop in annual profit as weaker consumer spending in Europe drove sales down, prompting a decision to exit Norway and Portugal. Chief Executive Officer Ronald van der Vis said he may hire designers in China, where retail spending surged 18 percent in July from a year earlier.
"Net income in China should more than double over the next five years and margins will expand as the company achieves scale," Matt Marsden, an equity researcher at Samsung Securities (Asia) Ltd. in Hong Kong. "Doubling revenue there over the next five years implies 15% growth per annum, which they should easily manage."
Esprit plans to have stores in 400 China cities, more than double the existing 169, it said in a statement to Hong Kong's stock exchange today.
China Outlets
Chief Financial Officer Chew Fook Aun said the biggest clothier listed in Hong Kong "hopes to open" at least 20 standalone stores in mainland China this year.
The company has 931 mainland Chinese points of sale, which include department-store counters and standalone stores. Sales for Esprit on the mainland, which excludes Hong Kong, Macau and Taiwan, were at least HK$793 million, 2.4 percent of the total.
"Europe's consumer confidence doesn't look very stable," Chew said. "In the next few years, we are holding higher hopes on mainland market."
Hiring Chinese designers would help Esprit expand in China, said Winnie Fong, an analyst at TaiFook Securities in Hong Kong.
Esprit slid 3.6 percent at the close in Hong Kong trading after its results announcement. The decline extended Esprit's retreat this year to 17 percent, compared with a 4.6 percent drop in the benchmark Hang Seng Index.
Net income for the year ended June fell to HK$4.23 billion, or HK$3.34 a share, from HK$4.75 billion, or a restated HK$3.71, the clothing retailer said. That compared with an average estimate of HK$4.42 billion by 11 analysts surveyed by Bloomberg. Sales decreased 2.2 percent to HK$33.7 billion.
Same-store sales, which exclude the impact of newly opened outlets, fell 2.4 percent, the statement said.
Revenue Breakdown
"Closing loss-making stores in the U.S. and Europe is an excellent idea, which should boost profit margin," Samsung Securities' Marsden said.
Revenue from Europe fell 4.6 percent to HK$28 billion ($3.6 billion). The retailer's sales in Germany, its biggest market, decreased 4.4 percent to HK$14.8 billion. In local- currency terms, Germany sales dropped 6 percent.
Revenue from Asia rose 11.5 percent to HK$4.63 billion during the fiscal year and U.S. sales climbed 10 percent to HK$526 million.
Esprit "is underpenetrated" in Chinese cities including Guangzhou, Dalian, Chengdu and Chongqing, Chew said. There's also potential to expand in Beijing, where the market is still growing, the chief financial officer said.
Esprit cut capital expenditure to HK$1.51 billion from HK$2 billion, with HK$576 million spent on new stores.
The company proposed a final dividend of 67 Hong Kong cents a share. It won't pay a special dividend. Esprit paid a special dividend of HK$1.33 per share last year
