|Corporate Profile||Business Summary:|
The Group is principally engaged in wholesale and retail distribution and licensing of quality fashion and lifestyle products designed under its own internationally-known Esprit brand name.
Performance for the year:
For the year ended 30 June 2012, Group turnover was HK$30,165 million (2011: HK$33,767 million), representing 10.5% decline in local currency.
Gross profit was HK$15,206 million (2011: HK$18,198 million) reflecting a gross profit margin of 50.4% (2011: 53.9%).
The 2011/2012 financial year (“FY11/12”) was a year of fundamental change for Esprit. In September 2011, the Group launched the Group’s four-year Transformation Plan, to re-establish Esprit as a leading, international fashion brand and to restore long-term, sustainable profitability.
Based on a newly defined Esprit brand direction, the Group has committed itself to invest around HK$18.5 billion over the course of the Transformation Plan to sharpen Esprit’s brand profile, to upgrade the shopping experience for the Group’s customers and to design more fashionable and valuable collections. The Group will focus the Group’s efforts on the Group’s core markets in Europe and China.
In the first year of the launch, the Board and the management team of Esprit have maintained a strong commitment to executing the plan despite the prevailing challenging market conditions. The Group is very pleased to report that good progress has been made and the Transformation Plan is on track in driving the future growth and profitability of the Group’s business.
Esprit’s business in FY11/12 was impacted by the overall negative market sentiment, especially in Europe where the Group does the majority of its business. It was also impacted by investments made as part of the first year of the Transformation Plan. Also, the Group’s turnover was affected by bold decisions as part of the Transformation Plan to close down unprofitable stores, exit the North American market and the on-going rationalisation of the Group’s wholesale accounts.
Consequently, Group turnover decreased by 10.5% in local currency to HK$30,165 million. However, notwithstanding global economic conditions, the Group was able to achieve an operating profit (“EBIT”) of HK$1,171 million, an increase of 69.2% compared to the same period last year. The Group’s EBIT margin also improved to 3.9% from 2.0%.
After having made good progress during the first year, the executive management team continues to be very focused on the execution of the Transformation Plan. It is encouraging to see how the transformation is being realised and how the brand’s core competencies and potential have already begun to unfold.
A Strong Brand that will be Further Revitalised by the Transformation Plan
According to a recent survey conducted by Brandmeyer Markenberatung GmbH in March 2012, Esprit was ranked the third favourite brand in Germany of all industries. The Group’s modern, stylish and feminine advertising campaigns featuring supermodel Gisele Bündchen continue to be positively received by the Group’s consumers. More importantly it is lifting the Group’s brand consideration levels significantly in those markets. This was one of the most important targets for the first year of the Group’s Transformation Plan. An increased level of consideration is the first step towards more visitors to the Group’s stores, increasing the Group’s conversion rates and driving long-term customer loyalty. The Group also received Germany’s prestigious Out of Home PlakaDiva award for Excellence in Advertising in 2012. The Group are also stepping up the digital brand experience for the Group’s customers. The Group are in the process of creating an integrated digital destination by combining inspiring brand content, a high-performance online shop, and an appealing customer club under one portal.
Enhanced Store Experiences
As part of transforming and revitalising the Esprit brand, the Group are placing particular emphasis on the Group’s consumers’ in-store shopping experience. This includes refurbishing the Group’s stores worldwide with improved layouts, and new visual concepts, particularly in regards to windows and entrance areas.
It is the Group’s daily mission to inspire the Group’s customers, and as such the Group are creating a new and exciting shopping experience through the implementation of multiple store formats. The Group launched 3 unique Lighthouse store concepts in FY11/12, in Cologne, Antwerp and Düsseldorf, which reflect the modern spirit of Esprit based on the Group’s Californian heritage. The Group have received very positive feedback and high levels of satisfaction from the Group’s consumers following the opening of the new stores.
The success of the Lighthouse stores will form the basis for upgrading the Group’s retail and wholesale store networks which will be refurbished worldwide as part of the Transformation Plan to improve consumers’ in-store shopping experience. The Group have been able to transfer elements to the development of the Group’s icon, standard and retreat stores. Icon stores are individually designed and are reserved for the Group’s best locations in large, high-profile cities, while standard stores have been renovated according to the Group’s latest refurbishment concept, and aim to provide a cosy and inspiring atmosphere. Retreat stores are stores that will not be refurbished in the immediate future but are made more appealing to customers by upgrading visual merchandising and the overall shopping experience.
In line with the Transformation Plan, 12 premium icon stores were created and an additional 34 stores were fully refurbished. Feedback on these new stores has been very positive – the Group’s customers have praised the way the stores have revitalised the overall image of the Esprit brand.
Creating Fashionable Collections with a Distinctive and Consistent Esprit-handwriting
Under the direction of Melody Harris-Jensbach, Esprit’s new Chief Product and Design Officer, the Group’s product offering has embodied a more aligned creative direction and the Group have a pipeline of new, fashionable collections that are ready to go to market.
As part of the Transformation Plan to increase both the fashion level and speed to market, the newly established Trend Division developed its first collection within 12 weeks, from sketch to stores. The first collections for July 2012 from the Group’s new Trend Division were delivered to selected retail stores in Europe while the Group’s first “China for China” range was launched throughout the Group’s stores in Asia. Market response to these new feminine and fashionable collections has thus far been excellent.
The Group’s newly established Denim Division will now encompass the Group’s cross divisional denim expertise, and introduced its first collections in August 2012. The initial sell-in results reflect a very positive trend.
The Group’s sourcing and supply chain strategy continues to deliver good results. After the opening of new sourcing offices in Bangladesh and Northern China, an additional office was opened in Indonesia in May 2012. In order to drive sourcing synergies across the Group’s product divisions, all sourcing functions were grouped into one central buying organisation starting in second half of the financial year.
Stronger Relationships with selected Wholesale Partners
The Group continue to offer strategic growth and refurbishment support to the Group’s wholesale partners and have achieved a promising initial set of results. The Group have reached agreements with over 400 of the Group’s targeted “Ambassador” accounts in Europe and have refurbished 43,000 m² controlled wholesale space in FY11/12. Also, in order to better present the new Esprit to the Group’s wholesale partners, selected showrooms will be refurbished to be in line with the new Esprit concept.
The Group’s selected partners have recently improved their order intake and the Group have received very supportive feedback from them. The Group also regularly update the Group’s wholesale partners about key developments and the progress of the Transformation Plan.
Bold Decisions Taken to Eliminate Unprofitable Businesses and Operations
As part of the Transformation Plan, the Group decided to divest the Group’s loss-making North American operations. All directly managed Esprit retail stores in North America were successfully closed. The closing-down was achieved well within the set time frame and provisions, resulting in a positive effect, net of operational losses, of HK$468 million. The Group also made good progress with the store closure program outside North America. 80% of stores under the store closure program outside North America have been closed or are in the process of closing.
Next to the store closures, the on-going rationalisation of unprofitable wholesale accounts had a negative effect on the Group’s turnover development. However, this process is necessary and will improve efficiencies and brand equity.
On the other hand, the Group continue expanding the Group’s retail foot print. During FY11/12, the Group’s proforma retail space expansion, excluding closures under the store closure programs and the divestment of North America, recorded a healthy growth of 6.5%, which was in line with the Group’s target.
Building a Strong and Experienced Executive Management Team
For the successful implementation of the Group’s Transformation Plan, it is crucial to have an international and experienced executive management team. The Group’s Group Chief Executive Officer, Ronald van der Vis has spent a lot of time during the last two years in building a strong senior management team.
Two new senior managers joined the Group’s executive management team this fiscal year. In January 2012, Melody Harris-Jensbach joined Esprit as Chief Product and Design Officer, responsible for all product development and license activities of the Group. In March 2012, Armin Broger joined the executive management team as Brand President edc. In addition, the Group’s Group Chief Financial Officer and Executive Director, Thomas Tang, came on board in May 2012.
With these new hires, the strengthening of the executive management team has been successfully completed.
Looking ahead, the macro environment in FY12/13 continues to present challenges and uncertainties, such as slowing economic growth in China and the unresolved European debt crisis. Now that the Group’s Transformation Plan is well underway, the Group will stay on course to revitalise the Esprit brand and create innovative and inspiring product designs and shopping experience for the Esprit Woman.
In FY12/13, the Group’s goal is to continue the Group’s transformation journey, implementing it rapidly and consistently. The Group’s first and foremost priority is to leverage the strengths of the talented team on core processes to realise cross-functional transformation. Furthermore, the Group will drive store productivity through focusing the Group’s market efforts on traffic generation and conversion, having an on-time and continuous inflow of fashionable and feminine products in store as well as inspiring and enriching customer shopping experience by the roll-out of new store formats. On the wholesale front, the Group will continue to rejuvenate the business by enhancing the team and business model as well as strengthening partnership with key wholesale customers. Last but not least, the Group will continue to ensure sourcing initiatives are on track and drive sourcing synergies across the Group’s product divisions. Regarding China, stepping up the Group’s efforts to accelerate growth will be the Group’s top priority in the country.
Drive Store Traffic and Productivity
With the success and high visibility of the Gisele-focused campaigns, Esprit’s brand consideration in the Group’s core markets continued to improve. In Germany, the Group’s brand consideration level improved from 50% prior to the campaigns to 58%. In China, the Group’s brand consideration level advanced substantially from 30% prior to the campaigns to 59%. While the Group have succeeded in improving brand consideration, this positive outcome has not yet been translated into an increase in overall traffic in the Group’s retail stores due to the poor macroeconomic environment which has weighed on consumer sentiment and spending. In this environment, there has been both a reallocation of consumer spending away from apparel as well as trading down in the apparel sector towards value players. As a response to these market dynamics, the Group plan to drive store traffic through further enhancement of the in-store shopping experience together with well-targeted media campaigns.
The Group’s media strategy for the new financial year will continue to focus on sustaining high brand consideration levels as well as on improving store traffic. The Group’s media campaigns will be more POS-focused to include elements such as store opening events and visual merchandising. The Group will deploy a media strategy which will be in line with the timing of the Group’s new product introduction.
Building on the success of the Lighthouse store projects, the Group will ramp up the roll-out of new store formats to offer the Group’s customers a more inspiring shopping experience. This involves refurbishing a total of more than 990 POS or approximately 153,000 m2, comprising over 90 existing retail stores (or approximately 65,000 m2) and over 900 controlled wholesale POS (or approximately 88,000 m2) in the new financial year.
Fill the Perfect Wardrobe with More Modern and Fashionable Products
Since the launch of the first products of Trend Division and China Design Hub, their product performances have been encouraging. Sell-through of Trend Division’s products was more than double that of other women’s collections. The next collections will also be rolled-out across Europe and Asia. There is also increasing momentum in the sellthrough of China Design Hub’s products. For the month of August 2012, their sellthrough was similar to other products of the women’s divisions. In view of the encouraging performance of the new Trend Division and the “China for China” products, the Group will continue to focus on boosting the performances of these new lines. Trend’s Fall/Winter 2012 collections will be infused with more stylish designs and special colour themes for each season, such as “Inflamed” in August 2012, “Military Luxe” in September 2012, “Wonderlands Neutral” in October 2012 and “Midnight” in November 2012. The Trend Division is also building a team to develop product lines for men. In future, Trend Division targets to represent 5% - 10% of total offerings while “China for China” products target to represent 15% - 20% of total styles offering in Asia.
The Denim Division is on track to introduce its first products to stores in December 2012. A new women’s denim fit portfolio called “Love your fit” has been developed and it comprises a portfolio of nine individual iconic fits for all wearing occasions. Based on the first bookings received for December 2012 and January 2013, the initial response appears to be positive.
In November 2012, the Group will introduce the new Wellness capsule launched as part of a global campaign featuring Christy Turlington, a super model and international icon of beauty and a healthy lifestyle. Wellness is an essential part of life and is strongly linked to Esprit's brand and its Californian heritage. The Wellness collection is a soft and relaxed collection that combines elements from sportswear, in terms of fabrics, detail and cut, and fashion.
Strengthen the Wholesale Platform
In a difficult operating environment, the Group’s priorities for the wholesale business will include initiatives to enable us to overcome market challenges in order to drive growth and improve productivity. These initiatives include regaining space by strengthening the Group’s strategic partnerships with major wholesale customers as well as strengthening the Group’s platform and focusing on franchise business. The Group is encouraged by the fact that wholesale support measures are bearing fruit. The improving trend in order intake for wholesale accounts is encouraging.
Accelerating Growth in China
Under the leadership of, Holly Li, Esprit’s new China CEO, much effort has been put in improving store productivity, building key organisational capabilities and devising shortterm and long-term initiatives to support the transformation. The Group have established the China Design Hub to inject local designs and styles to the Group’s collections even better to the requirements of Chinese consumers and are focused on strengthening core competencies in areas such as product development, store experience and marketing, which are vital in enabling us to successfully navigate the challenges of an increasingly competitive and complex market environment.
Large scale store renovation has been planned in China for FY12/13 to rejuvenate the shopping experience and create a more exciting and beautiful environment for the Group’s customers by optimising visual merchandise as well as rolling icon and retreat store formats. The retail store improvement plan for FY12/13 includes 1 icon store, 25 retreat stores and 15 normal rebuilding stores. Approximately 40 wholesale controlled POS will be renovated into retreat stores and another 40 normal rebuilding stores are planned for FY12/13. The Solana store in Beijing was the first icon store in China and has been reopened since September 2012.
In the mid-to-long term, particular emphasis will be on accelerating network expansion, establishing a new wholesale business model and continuing to build the required key capabilities to drive growth initiatives and support the transformation. The Group’s plan to increase the Group’s city coverage from the existing 1,013 POS in 191 cities to approximately 1,900 POS in about 400 cities by FY14/15 remains intact. The new position Head of Expansion for China was created since June 2012 to execute POS expansion. In FY12/13, the Group plan to have 75 new retail store openings. In addition, a new wholesale business model will be implemented to allow for stronger strategic support for the Group’s wholesale partners in aspects such as store renovation and new store openings in order to ensure a better and more consistent Esprit retail experience.
Ensure Sourcing Initiatives are On Track
The Esprit’s new and modern distribution centre in Mönchengladbach Germany began operations in July 2012. It has an effective warehouse area of 46,000 m2 (equivalent to more than six football fields) and is highly automated with a throughput of 150 million pieces. The facility has the potential to grow to 200 million pieces. The distribution centre systems provide reliable and current stock inventory information which facilitates a highly transparent and better managed operations and production. This in turn significantly improves service quality to the Group’s customers and lowers operating costs. For example, the handling cost per piece is expected to be reduced by approximately 25%. The Group expect approximately €10 million in annual savings when the distribution centre is fully operational by end of FY12/13 as well as a completely balanced goods flow to ensure the right merchandise is on the Group’s retail shop floors around the world at the right time.
The Group are on track to expand the Group’s sourcing country footprint. In addition to the Group’s new sourcing office in Bangladesh and the quality assurance office in Indonesia, the Group’s new sourcing office in India is on schedule to be operational in October 2012.
While it appears likely that the global economy will continue to be weak in the new financial year, any further deterioration of the economic climate will present additional challenges to the implementation of the Group’s Transformation Plan and ultimately to the Group’s financial performance. Despite the market challenges, the Group are confident that the first combined effects of the transformation initiatives will be evident in Esprit’s financial results in the new financial year. Total capital expenditure in FY12/13 is expected to reach approximately HK$1.5 billion, of which HK$0.4 billion will be invested in new store opening including opening over 40 new full-price stores and over 20 new outlets, HK$0.7 billion in the refurbishment of existing stores and HK$0.2 billion will be invested in IT projects.
Backed by the strong commitment of the Group’s experienced management team and that of all of the Group’s employees worldwide, the Group are confident that the transformation process will be completed successfully revealing the full potential of the Esprit brand and achieving the level of profitability that it deserves.