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Financial Analysis on Esprit

Essay by   •  January 19, 2011  •  Case Study  •  2,873 Words (12 Pages)  •  2,660 Views

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1. Executive Summary

Esprit is principally engaged in wholesale and retail distribution and licensing of fashion and life-style products designed under its own ESPRIT brand name. The company's 12 product lines are composed of women's, men's and children's wear sold through over 800 directly managed stores and over 14,500 wholesale points-of-sale in Europe, Asia Pacific and North America. The company was listed on the Hong Kong stock exchange in 1993.

In fiscal year of 2010, Esprit reported a decline in revenue of 2% to HK$33,734 million because of a 13% decline in wholesale revenue. Despite the gross margin raised up 2.6%, the net income came at 10.9% declined. This was mainly attributed to few exceptional expenses relating to the store closures and acquisition of China business. Liquidity was also not well due to higher Debt to Total Assets and long receivable collection period. Downside risks include Esprit's new management team, which has yet to prove its performance; fluctuations in the Euro exchange rate and its weak macro economy environment (more than 80% of sales come from the European market) which could affect Esprit's sales.

In the annual meeting, the new management introduced six initiatives for improving the brand, sales and earnings. With acquisition of the outstanding China business and mapped out a plan to double sales in next five years which will contribute the main source of revenue of retail business in Asia in the future.

On the upside, despite some falls comparing to figures of 2009, most of the figures on the liquidity, profitability and solvency ratio analysis indicates that they are better than the industrial average. In summary, a HOLD status is recommended.

2. Company Profile

Esprit Holdings Limited is an investment holding company. The Company is primarily engaged in wholesale and retail distribution and licensing of quality fashion and life-style products designed under its own internationally-known brand name ESPRIT. Its operation spread across Europe, Asia Pacific and North America and they are very aggressively in expansion in China market lately.

Esprit offers 12 product lines including women's wear, men's wear, kid's wear, youth, as well as shoes and accessories in over 800 directly managed retail stores and over 14,500 controlled-space wholesale point-of-sales internationally. In addition, Esprit's Red Earth cosmetic brand offers cosmetic, skin care and body care products. Esprit licenses its trademark to third-party licensees that offer non-apparel products. Esprit salon offers hair styling, as well as nail, make-up, and beauty services.

Its share is a component of the Hang Seng Index, MSCI Index Hong Kong , FTSE All World Index for Hong Kong as well as S&P Asia 50 Indexstock market indices.

The Group recorded a turnover of HK$33,734 million with a gross profit of HK$18,436 million and net profit after tax of HK$4,226 million. Cash and bank balances increased to HK$6,748 million as at 30 June 2010. Basic earnings per share were HK$3.41 for the year ended 30 June 2010.

2.1 Recent History

In 2008, Esprit financed the construction of SOS children's in the Indian town of Alibaug. This project focuses on education and support to help individuals to lead strong lives.

In January 2010, the company signed a five-year term loan agreement to raise HKD2.6 billion from 13 banks for using on the acquisition of the remaining interest in the China joint venture from China Resources Enterprise

In April 2010, three senior management members, Thomas Johannes Grote, President and CEO, Volker Schmdit, Senior VP and Header of Partnership and Jim Nowak, Head of Esprit Casual, resigned from their position.

In mid of 2010, management announced new six strategic initiatives (Global Brand, Products, Channel & country, Import COGS, Support function and Organization and culture) to boost growth and profitability by making our brand, products and stores more inspirational for our customers

3. SWOT Analysis

Esprit has a large sales network worldwide, with the majority of sales turnover generated from the European countries. The business strategy of diversification in both the geographical sales network and the sales models enables Esprit to mitigate risks against having localized sales location and sales channel, similar to that of Giordano International Limited.

Heavy reliance on European sales, while reported in Hong Kong dollars, implies that the revenue is subjected to currency fluctuation. With the volatility of Euro, Esprit's revenue may be hindered by possible currency fluctuation.

Late entering into the China market may also be a hindering factor for obtaining the marketing shares from the repaid growing China market.

Strength Weakness

Worldwide sales network and diversified sales channel High reliance on Europe to generate revenue

Good mixture in management team Low market shares in the growing PRC market

Opportunities Threats

Continue expansion in China Escalated competitions

Currency fluctuation

3.1 Strength

Worldwide sales network and diversified sales channel

Esprit has well established sales points in three major geographical market locations, the Europe, the Asia Pacific and the North America. Esprit distributes her products by different sales channels including wholesale, retail and licensing and several other non-apparel related business. The strategy of having multiple markets and sales channels distinguishes Esprit from her major competitors. For instance, Giordano and Bosinni have strong emphasis in China market, where French Connection concentrates in Europe and North America. This strategy offers Esprit enough flexibility for Esprit to plan for the future focus, as Esprit can take advantage of their existing facilities to cope with any change in their business plan. Furthermore, having diversified sales points enables Esprit to mitigate her business risk more effectively comparing to have one single market location.

Good mixture in management team

Esprit has a strong organization structure, whereas the Company Governance has well defined corporate governance. There are five non-executive directors and three executive

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