Hong Kong listed fashion group Esprit says its full year financial loss masked a positive phase of its turnaround program.

Full year turnover fell 11.5 per cent (or 19.8 per cent in Hong Kong dollars) and the company posted a loss of HK$3.683 billion, largely due to impairments.

In its profit announcement the company described the year as “exceptionally challenging” with trading affected by both internal and external factors.

“Nevertheless, from a strategic perspective, it has been a year of significant achievement as the group completed the most vital and demanding phase of our turnaround plan. We have successfully installed the foundation enabling us to enhance our products and optimise sales performance across all channels (online, offline, retail and wholesale).

“It is encouraging to see the first signs of a positive sales trend for our new Vertical Products’, which gives us confidence we are on the right track to restoring the competitiveness of Esprit.”

The group blamed the sales decline on reduced store numbers (down 8.8 per cent), an unusually warm winter in Europe which impacted on Autumn/Winter sales volume and prices; declining apparel sales in Germany (the total market shrunk in nine of 12 months);  internal restructuring and unfavourable exchange rates.

Group CFO Thomas Tang said that although the challenging market had considerable impact on Esprit’s turnover, its gross margin remained stable and savings were achieved in most cost lines of our regular operations.

“With our priority on cash preservation over the past two years, the Group is on a sound financial footing, with a healthy balance sheet that we intend to leverage to decisively execute the strategies that shall drive top line growth in the near future.”

Esprit is debt free.

Tang said the last financial year was devoted to the implementation of the most demanding, yet vital, part of the group’s strategic plan: the ‘Transformation’ phase. During this phase, a vertically integrated business model (‘Vertical Model’) was introduced within Esprit to enhance the speed and efficiency of its product development and supply chain processes, and thereby significantly improving the design and value for money of its products.

More specifically, the following have been implemented:

• Lean supply chain management (from over 350 to below 230 suppliers).
• Category management teams (all product divisions transformed).
• New merchandising model (buying and merchandising fully centralised).
• Reduction in product range (30 per cent to 40 per cent reduction of options).
• Seasonal product calendar (from 12 monthly collections to four seasons).
• Fast-to-market product development (two to three months lead time in the Trend Division and the fast-reaction capsules in all other divisions).
• Stock management optimisation (pending additional stock replenishment capacity and capabilities in the central distribution center).

“More importantly, the group has observed progressively positive developments in terms of product sales performance following the introduction in February 2015 of the Spring/Summer 2015 collections, the first ones developed under the Vertical Model: Retail turnover decline has narrowed consistently over each subsequent quarter during the year (Q1 -15.0%; Q2 -10.3%; Q3 -8.3%; Q4 -6.8%).

Same store sales rose 4.1 per cent in the quarter to August and sales in Germany, its largest market, outperformed the market in each of the last three months.

Retail sales of the Esprit Women divisions recorded 5.3 per cent year-on-year growth for the last three months and the Trend Division (representing 2.6 per cent of group turnover), reported full year turnover growth of 29.7 per cent.

Esprit chairman Raymond Or said the group maintained a clear focus to execute the most complex and critical phase of its transformation in the year past, and made good progress despite a difficult operating environment.

“The growth phase that we are now embarking upon is not without its challenges, but there is much hope and excitement across all levels of our organisation as we leverage the strong foundation that we have laid over the last two years. Every successful journey takes time, and we believe that we are nearing our final destination – which is to restore the long term competitiveness of our group.”