Esprit has issued a surprise profit warning to investors saying it expects a “substantial loss” in the full year to June 30.

The warning is a surprise, because just 11 days earlier the Hong Kong-listed fashion retailer said its turnaround program was “on track” with a good customer response to new ranges and positive traing improvements.

“We remain fully confident that our current strategies will enable us to turn around Esprit and to establish a strong foundation for future long term growth.”

However, in a document filed with the Hong Kong Stock Exchange yesterday (Monday May 18), Esprit appears to have reconsidered its position based on figures for the 10 months to April 30.

“The anticipated loss is mainly attributable to the following non-recurring provisions and impairments resulting from management’s assessment of the fair values of the assets of the group, as well as an expected operating loss:

“Due to the significant underperformance of the group’s operations in China in the past two years (turnover decline of 28.3 per cent and 21.6 per cent year-on-year in local currency for 2014 year and for the first half of 2015 respectively), there is an impairment of the goodwill in association with the China business estimated to be in the range of HK$2,500 million to HK$2,700 million. This impairment is a non cash item. A number of factors, both external and internal, have led to such weak performance in China, mainly the year-on-year reduction in total controlled space (down 24.3 per cent in 2014 and 23.1 per cent in the first half of 2015) which results from our decision to close unprofitable retail stores and the large decline of controlled wholesale space; and Inventory clearance by wholesale partners, including the special return agreements to solve our long time problems with aged inventory in the wholesale channel; and a challenging operating environment and softer domestic economic growth.”

Esprit says the necessary restructuring of the operations in China is now complete and it is beginning to work on growth development in the country.

Furthermore, due to the weaker than expected sales performance of directly managed retail stores, there are provisions and impairments, which are non-cash items for 2015, resulting from provisions for store closures and onerous leases, estimated to be in the range of HK$280 million to HK$300 million and impairment of fixed assets of directly managed retail stores, estimated to be in the range of HK$160 million to HK$170 million.

Finally, the company is expecting an operating loss, as a result of higher than expected decline in the group’s turnover, especially during its Autumn/Winter 2014 season, and the corresponding operating deleverage effect.

The company said final results for the year to June 30 are expected to be released in September 2015.

Esprit reiterated its “good progress” in various fronts of the transformation plan.

“In anticipation for continued improvement in product performance, we will be increasing our efforts in marketing as well as in implementing an ambitious omni-channel model that will enhance the customer experience across our multiple distribution channels.

“The group remains confident our current strategies will enable us to turnaround Esprit and to establish a strong foundation for future long term growth.”