Blue-chip clothing giant Esprit (Hong Kong stock no. 0330) reported an 11% fall in full-year net profit and said it would gradually shift more of its business to Asia by doubling sales on the mainland in five years and increasing its presence there to 400 cities. In a statement to the Hong Kong stock exchange, the company, which operates in 169 cities on the mainland, said it aims to increase the number of outlets from 931 to more than 1,700 and retail space by more than 70%.

The stock hit a new 52 week low at HK$40 and tumbled 5.36%, closed at HK$40.6 Friday on top of 3.1% post-results fall Thursday amid downgrades by large funds.

Credit Suisse

CS lowered FY11-12 EPS forecasts by 13%-17%, cut target price to HK$41.00 from HK$48.00, and kept Neutral call. The House said FY results disappointing, and it noted that the management set long-term dividend payout ratio of 60%, lower than historical range of 70%-80%. It said while management emphasized expansion opportunities in China, “we believe the retail-driven strategies may result in lower overall margin in the near term, as it takes time for new shops to ramp up.”

Citigroup

The House cut Esprit target to HK$59.00 from HK$62.00 after lowering fiscal FY11-12 earnings forecasts by 10%-14% as recovery in wholesale business slower than expected, unfavorable currency in FY11. Tahe House said fiscal FY10 net profit down 10.9% on-year at HK$4.226 billion on 2.2% decline in revenue, coming in below expectation. It noterdthat 2H10 retail EBIT margin excluding exceptionals fell sharply to 3.3% from 15.2% in 1H10. In addition to seasonal factors, it could suggest heavy discounting. Noted at briefing, management focused on aggressive strategic initiatives, including plans to double China revenue in 5 years. FY11 outlook remained uncertain, but the House kept at Buy. “Esprit remains very cash generative, and maintains a consistent dividend payout policy. The China market and new initiatives from the new CEO could offer upside in the longer term.”

CIMB Research

The Housae downgraded Esprit to “neutral” from “outperform”, and lowered its target price from HK$78 to HK$47.5. The house said the earnings disappointment was largely due to weaker retail performance and higher operating costs and tax rate. In view of the slower recovery and increase in operating expenses as the group builds out its retail platform and strengthens its brand, CIMB slashed its FY11-12 EPS estimates by 22.5-26.7%.

Morgan Stanley

It chopped its target price for Esprit from HK$73 to HK$52 but it maintained its “overweight” rating. The house said Esprit’s mid-term recovery story remained intact and valuation looks reasonable with a decent 5% cash yield. It believed many of the strategic initiatives Esprit was working on such as branding, product improvement, channel, sourcing, and its ambitious China expansion plan (doubling sales in 5 years) could yield fruitful results in the mid-term. As the F2010 results were below expectations, Morgan cut its F2011-12 earnings by 20-22% to factor in lower Euro rate, and slower sales recovery hence more operating deleverage.

UOB KayHian

The House said, “Esprit is still restructuring and we do not expect it to return to its former earnings growth trajectory soon,” noting that the stock is trading at 17X FY11 P/E which was higher than global peers’ average P/E. “We cannot find a reason to buy the stock in view of the continued decline in wholesale orderbook and uncertain outcome resulting from the new organisational structure.” It thus kept Sell call with HK$38.80 fair price.

Nomura

The House said Esprit’s FY10 normalized net profit came in at HK$2,966mn, well below the house’s forecast and market consensus. Weak numbers were mainly due to weak topline, negative operating leverage, and closure cost of loss-making retail stores. There remained uncertainties in the macro environment of EU, which accounted for 83% of Esprit’s sales in FY10. The House did not expect significant earnings contribution from its China business (7% of its sales on the proforma basis in FY10) in the short-to-mid term given its current low base and competitive retail market. Thus, the House put its earnings forecast and target price of HK$62 under review with downward bias. It retained “neutral” call on the stock.

CIMB Research

It downgraded Esprit to “neutral” from “outperform”, and lowered its target price from HK$78 to HK$47.5. The house said the earnings disappointment was largely due to weaker retail performance and higher operating costs and tax rate. In view of the slower recovery and increase in operating expenses as the group builds out its retail platform and strengthens its brand, CIMB slashed its FY11-12 EPS estimates by 22.5-26.7%.

Goldman Sachs

The House said Esprit’s 2HFY10 results were weaker than the house expected, driven by operating deleveraging. Factoring in weaker results, Goldman reduced its 2011/12 EPS by 14%/9% but it maintained its “buy” call and HK$55 target on the stock. It noted that company’s guidance of Jul-Nov 2010 wholesale order book now shrinking to a mid-single-digit yoy decline is the cycle trough signal that Goldman had been waiting for. The newly unveiled target to grow China business to 20% of its sales and profit within 5 years could possibly lead to stock re-rating. Closure of 33 loss-making stores and 20% yoy cut in year-end inventory could translate into strong pickup in retail OPM in the coming years too.

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