Stock Market Predictions

Esprit shares tumble 20 percent after dismal earnings

Stock Market Predictions

A 98-percent decline in profit announced at midday on Thursday led to 17 percent decline then and to a spate of downgrades by securities houses.

Traders voiced concerns about the company's medium-term business outlook despite Esprit's plans to restructure its business and reinvigorate its brand, brokers said.

Shares of Esprit were trading at HK$12.02 on Friday morning, down more than 19 percent after sinking to HK$12, the lowest since October 2002. It was the worst performer on the benchmark Hang Seng Index .HSI on Friday, which was up more than 2 percent.

"There is definitely some liquidation of long positions, particularly from the major funds," said Jackson Wong, vice president for equity sales at Tanrich Securities. "This stock has been on a lot of people's sell list even before the results yesterday."

Esprit is also the biggest loser among Hang Seng Index components for the year, down nearly 70 percent. The losses on Thursday and Friday marked its worst two-day drop since October 1997.

CLSA said in a research note that it had cut its earning estimates for Esprit by 52-83 percent for the next two years and slashed its price target by 47 percent to HK$12.50 from HK$23.50. It downgraded the stock to sell from underperform.

TURNAROUND PLAN RISKY

Esprit on Thursday said it planned to sell its North American operations after reporting a massive slide its full-year profit.

Esprit, whose competitors include Swedish clothing retailer Hennes & Mauritz AB (HMb.ST), U.S. group GAP Inc (GPS.N) and Spain's Inditex (ITX.MC), said the business outlook for the next six months was challenging, citing weak consumer sentiment in Europe, which is embroiled in a worsening debt crisis.

Europe generated about HK$26.7 billion ($3.4 billion) in sales, or 79.1 percent of Esprit's total, for the year to June 2011, down from 83.1 percent a year ago.

"Since the restructuring and transformation needs three to four years to complete, there is still a long, tough way to go, a lot of uncertainty ahead," said UOB Kay Hian director Steven Leung, adding that the stock would come under more selling pressure.

Esprit, which also competes with Japan's Fast Retailing (9983.T) in Asia, said on Thursday it would invest more than HK$18 billion in the company until its year ending 2015.

Analysts said the plan was fraught with risks.

"Management announced a HK$18.5 billion investment plan for the next four fiscal years to rejuvenate the brand, which in our view is risky," Credit Suisse said in a research note.

"The additional operating cost will affect Esprit's near to medium-term profitability and the large investment will further burden Esprit's cash flow," it said.

Credit Suisse also downgraded Esprit to underperform from neutral and cut its share price target to HK$9.65 from HK$25.15.

Some analysts are more upbeat about the firm's future.

"We view Esprit's decision to invest in its brand as the right decision. The real question boils down to whether the brand is impaired to a level where it cannot be turned around," Gary Pinge, a Macquarie Equities Research analyst, said in a research note.

"We think that Esprit has a good brand which can be turned around," he said. He reiterated he had an outperform rating on the stock, but cut his target price by 42 percent to HK$19.50.

Esprit said on Thursday it is ramping up investment in its brand. It is investing an extra HK$1.7 billion a year over the next four years to promote its brand, with marketing spending expected to reach 6-8 percent of revenue in the new fiscal year. The ratio will drop to 4-5 percent from financial year 2014/15, it said.

($1=7.791 HK dollars)

(Additional reporting by Clement Tan; Editing by Charlie Zhu and Matt Driskill)