Esprit:The last battle

Esprit reported yet another disappointing set of results with a net loss of。

HK$3.7bn, vs our forecast of HK$3.0bn loss, due to a weaker GPM. Withthe new products now in the stores, the company is ramping up itsmarketing efforts. FX should continue to be a drag in FY16/06. We expectthe company to remain loss-making for another two years, since costcuttingis mostly done and A&P expenses are necessary to potentiallyrejuvenate the brand. Maintain SELL; target to HK$5.75 from HK$6.10.

FY sales -12%

Sales came in at HK$19.4bn for FY15/06, down -20% in HK$, or -12% atconstant FX. This was in line with the 9M. Over 83% of Esprit’s sales camefrom Europe, hence the substantial FX impact this year. For the FY, wholesalewas down -14% at constant FX, as the company cut down underperformingareas. Retail was down -10%, with SSS at a very poor -7%, althoughmanagement believed it was due to a warm winter in Europe.

Limited room to cut costs

GPM came in 30bps lower at 49.9% due to heavy markdowns. Opex was flatYoY. We believe that Esprit has already cut most of the “fat” in the coststructure. Occupancy and logistics costs came down as the company shrankits sales areas. A&P expenses, however, jumped by +17% at constant FX tocomplement the roll-out of the new products. The company also bookedHK$2.5bn of goodwill impairment on its China business and HK$450mprovision for store closure and other fixed assets impairment.

FY16 outlook

Management stressed that the new products launched in Feb15 resulted in anencouraging improvement in retail sales. Yet, with high exposure to a softretail market in Europe, we argue that outlook remains challenging for Esprit.A weak EUR should continue to impact sales in FY16CL. The company alsoneeds to splash on marketing to promote its new products, and lift capex tobuild to catch the O2O trend in global retail.

Maintain SELL

We still see significant headwinds for Esprit. Competitors have gainedsubstantial market share while Esprit has struggled in the last few years. Netcash came down to HK$5bn as at Jun15 from HK$5.6bn a year ago. We lowerour estimates and maintain SELL to a new price target of HK$5.75 fromHK$6.10 based on DCF valuation.