Esprit's Profit Beats Forecasts, Confident of 2008

Robust European sales and a stronger euro helped Esprit Holdings slightly beat expectations with a 37 percent rise in first-half earnings, but the world's No. 5 fashion chain faces a potential hit to global consumer spending this year.


However the firm, which sells everything from shoes to bath towels and competes with the Benetton Group, Gap and Hennes and Mauritz, has paltry U.S. exposure and is confident of safeguarding a European-focused business.

Esprit, which is fighting for a larger share of Asia's booming fashion markets and invests up to US$40 million annually to expand its North American arm, said on Wednesday it's back in the market for acquisitions in 2008, noting that asset prices are sliding as private equity firms gradually exit the market.

"We will not buy a cheaper brand than Esprit. That's not our culture. It should at least be above Esprit's positioning," Chairman Heinz Krogner told reporters. "It's always opportunistic. You dream of the nicest girl in the world, and you just maybe get the second-best."

Esprit posted net profit of HK$3.3 billion (US$423 million) in the six months to December, exceeding expectations for HK$3.1 billion, the mean consensus of seven analysts polled by Reuters.

That result compares with HK$2.4 billion reported a year ago.

More than 80 percent of Esprit's sales came from Europe in the period. It also runs a joint venture with China Resources Enterprise in China, where it plans to have 800 outlets by end-June 2008.

While a global credit crunch has ignited recession fears and cast a pall over retail firms, analysts say Esprit can weather a downturn with its strong management and consistent execution.

"There's always crises in the world -- Asia financial crisis, 9-11, Iraq war, SARS. We're certainly still growing," Thomas Grote, President of Esprit Brand, told reporters.

Sparks Fly

Britain's top clothing retailer, Marks and Spencer, reported a 2.2 percent fall in like-for-like sales over Christmas, sending its shares south. Germany, nearly half Esprit's revenue, said retail sales fell 1.5 percent in November.

Esprit has said it is exploring acquisitions to shore up a brand portfolio that includes its own eponymous brand and the "edc" line. But it has kept mum on what it is targeting.

Market speculation has swirled for over a year that Esprit intended to spend up to US$1 billion to buy a premium brand, but executives have given no clue how much they intend to spend.

Executives said the firm has been talking to various parties from private equity to investment banks to brand-owners, but nothing had been finalised. "We're back in the market to have a look," Krogner said. "Private equity firms have disappeared from the scene. They've spoilt the price in the past."

Apart from acquisitions, Esprit said in 2007 it planned to expand in China. On Wednesday, executives said it and its partner in India aimed to open another 80 locations over the next 12-18 months, from 50 now. Executives said their Indian wholesale business more than tripled in the fiscal first half.

The retailer will spend HK$1 billion this fiscal year to open 100 directly managed stores, and around 2,000 points-of-sale outlets around the world.

Despite a projected slowdown in U.S. consumer spending, China's fashion market is booming.

In 2007, retail sales rose 17 percent to $1.23 trillion, and fast growth is expected to continue as well-heeled Chinese consumers demand better quality products and ritzier lifestyles.

Chief Financial Officer John Poon told reporters in August Esprit would be interested in buying out China Resources' stake in their venture. China Resources has been selling non-core businesses piecemeal to focus on beer and supermarket retail.

"We're ready, able and willing to take it back," Poon said.

Shares in Esprit rose 17 percent in the final six months of 2007, underperforming a near 28 percent leap on the benchmark Hang Seng Index. The stock closed down nearly 5 percent on Wednesday, ahead of the results.