|Corporate Profile ||Business Summary: |
The Group is principally engaged in retail and wholesale distribution and licensing of quality fashion and non-apparel products designed under its own internationally-known Esprit brand name in Germany, Rest of Europe（The Rest of Europe region includes the group’s business in America and the Middle East.）, Asia Pacific and via e-shop platform.
Performance for the year:
For the financial year ended 30 June 2016 (“FY15/16” or “Financial Year Under Review”), Group revenue amounted to HK$17,788 million (2015: HK$19,421 million), almost flat year-on-year (“yoy”) in local currency (“LCY”) with a slight decline of -1.1%. Net profit was HK$21 million as compared to a net loss of HK$3,696 million last year.
Overall market conditions have remained challenging. On the one hand, the group’s industry is going through significant changes fueled by the development of the online channels and increasingly aggressive price competition. On the other hand, the macroeconomic picture was uncertain in Europe and turned especially weak in the group’s Asian markets, with the economic slowdown in China and the devaluation of Renminbi combining to significantly dampen consumer sentiment. The weakness of the Euro currency against the group’s reporting currency, the Hong Kong dollar, also placed considerable pressure on the Group’s financial results.
Nonetheless, I am pleased to report that the Group recorded a net profit of +HK$21 million for FY15/16, driven by strong performance of the group’s retail channels (offline and online), reduced cost of the operations and a favorable net tax balance. The Group also obtained a material exceptional gain from the sale of office space in Hong Kong but this was offset by exceptional expenses resulting from the acceleration of cost restructuring measures (e.g. social plans in Europe).
Regarding the positive development of the retail channels, the group see how the Vertical Omnichannel Model implemented in FY14/15 is improving the attractiveness of the group’s products and the sales effectiveness of the group’s retail stores and e-shop. As a result, the group have achieved a gain in retail space productivity for the first time in nine years, and this trend has been consistent throughout the year. This growth was the result of a highly positive development in Europe, while the eroded consumer confidence in Asia took a toll on the group’s sales performance in the region. Unfortunately, revenue of the Group’s wholesale channel declined due to the reduction of controlled space. Overall, the Group’s revenue was HK$17,788 million, virtually unchanged year-on-year with a slight decline of -1.1% in local currency.
Regarding profitability, the group’s gross profit margin slightly improved and the operating expenses (OPEX), excluding exceptional non-recurring items, were reduced by -1.9% year-on-year in local currency terms, despite the group’s decision to significantly increase marketing and advertising expenses. As a result, the loss from underlying operations, excluding exceptional items, was reduced to a LBIT of -HK$572 million. As mentioned, a positive net tax balance complemented the group’s bottom line to reach a positive net profit of HK$21 million in the financial year under review.
All in all, FY15/16 has been a positive year for the Group with improved financial performance and successful development of the most critical elements of the group’s Strategic Plan. Moving forward, the group must keep the focus on improving the group’s bottom line and step up the efforts to accelerate the positive trends of last year, while tackling the pending matters and issues in the wholesale channel and in the Asia Pacific region, so that all areas of the group’s business contribute positively to the turnaround of Esprit.
As mentioned in last year’s “Letter from Group CEO”, growth will only come progressively as the Group still faces a decline of its wholesale space and retail space (as loss-making retail stores still need to be closed). The group must continue to counter this with better sales productivity and profitability measures. The outlook of the Group for FY16/17 is based on the immediate priorities presented in the “Letter from Group CEO” of this results announcement.
With respect to controlled space development, retail selling space is expected to decline by high-single-digit due to the group’s decision to accelerate the closure of loss-making retail space. In wholesale, controlled space is likely to decline at a rate similar to the one in the previous years.
Space productivity (sales per square meter) remains the group’s main focus by systematically enhancing the execution of the group’s Vertical and Omnichannel models. Improvement in FY16/17 will likely be more moderate than in FY15/16 as the group compare against higher sales per square meter levels in most of the stores. Still the group anticipate sustained productivity increases that must drive bottom line improvement throughout the year.
Thanks to the Omnichannel initiatives, the strong growth momentum of e-shop is expected to continue. Growth of e-shop revenue for Europe in FY16/17 will likely be in single-digit, as the group compare against a very large base, while the growth in Asia Pacific is expected to remain in high-double digit.
Regarding gross profit margin, it may be affected by the weakness of the Euro but the group aim to maintain a stable level or a modest increase.
As for OPEX, the group anticipate it to be visibly reduced by the accelerated closure of loss-making stores and the impact of the cost restructuring measures already implemented as part of the group’s goal to reduce HK$1 billion OPEX (excluding exchange rate impact) over the next two years (communicated in the last Investor Relations Day). Also, following the strong push in Brand marketing in FY15/16, the group plan to bring the group’s expenditure in marketing and advertising at a lower level in FY16/17.
CAPEX is expected to be similar to that of FY15/16. The group will continue to moderately invest in retail store refurbishment, Omnichannel initiatives, and the extension and upgrade of the group’s distribution center in Europe.