Esprit Falls in Hong Kong as German Retail Sales Drop

By Frank Longid and Theresa Tang

Sept. 1 (Bloomberg) -- Esprit Holdings Ltd., a clothing retailer that makes more than four-fifths of revenue in Europe, dropped in Hong Kong trading as retail sales in Germany fell for a second consecutive month.

Esprit tumbled for the fourth consecutive day, extending its slide to 24 percent since earnings on Aug. 27 showed slowing profit growth. The stock slid 6 percent to close at HK$61.10, the biggest loser on the benchmark Hang Seng Index. Esprit, which had seven consecutive annual gains until last year, has lost almost half its market value in 2008.

German retail sales fell 1.5 percent in July, following a 1.4 percent decline the previous month, according to government statistics released today. Consumer confidence in the nation, where the casual-clothing company makes about half of revenue, fell in September to the lowest since June 2003 after the economy shrank in the second quarter, the first contraction in almost four years.

``Investors are selling off Esprit on the poor growth outlook,'' Tommy Ho, a Hong Kong-based analyst at UOB-Kay Hian Ltd. who downgraded the stock to ``sell'' from ``hold'' on Aug. 28, said in a phone interview today. ``Weaker consumer spending in Europe, especially in Germany, would be its biggest challenge.''

The retailer, which sells jeans, shoes, bed sheets and towels in more than 40 countries, increased net income by 13 percent in the six months ended June, the weakest expansion since at least 2002, when it joined Hong Kong's benchmark Hang Seng Index. After announcing the earnings, Chief Executive Officer Heinz Krogner said he had put on hold a plan to buy a luxury brand for $1 billion.

`Too Expensive'

Krogner, who had earlier expressed interest in Donna Karan International Inc., said on Aug. 28 any acquisition will happen in 2009 at the earliest. ``Sometimes even cheap things are too expensive,'' he said in an interview last week in Hong Kong. Donna Karan was bought for $243 million in 2001 by LVMH Moet Hennessy Louis Vuitton SA, the world's biggest luxury-goods company.

The euro-area economy contracted in the second quarter for the first time since the debut of the currency almost a decade ago, as faltering sales undermined investment by companies and soaring costs eroded consumer spending. The stronger euro and slower global growth damped the region's exports just as the fastest inflation in 16 years hurt domestic purchasing power.

``We just have to weather this storm,'' said Krogner, who forecast Europe's economic difficulties to last for up to another two years.

Ratings Downgrades

Esprit's earnings results led to rating cuts by at least nine companies including Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., JPMorgan Chase & Co. and UOB-Kay Hian.

The retailer's shares plunged 18 percent on Aug. 28, the day after announcing earnings, cutting Esprit's market value by HK$17.9 billion ($2.3 billion), according to Bloomberg data.

Esprit's net income rose to HK$3.16 billion ($405 million) in the six months to June, its fiscal second half, from HK$2.8 billion in the previous year. Sales rose 25 percent to HK$18.7 billion. Second-half figures were derived from full-year results.

Full-year net income climbed 25 percent to HK$6.45 billion, 2 percent lower than the HK$6.6 billion average estimate of six analysts surveyed by Bloomberg. Operating profit margin narrowed to 20.7 percent from 21.1 percent in the previous year.

Hong Kong's Hang Seng Index fell 1.7 percent to 20,906.31 today.

To contact the reporter on this story: Frank Longid at flongid@bloomberg.net; Theresa Tang in Hong Kong at ttang3@bloomberg.net