Why you should brace yourselves for smaller Esprit stores

Cost-cutting choices ran out.

According to Barclays, Esprit has run out of the easy cost-cutting options--it now either needs to massively overhaul the existing business structure or turn around anaemic divisions and geographies where productivity is materially worse.

500k out of 700k sqm of operating space is working at sub-optimal productivity, hence the company continues to downsize underperforming space.

Here’s more from Barclays:

In 1H FY14 Esprit reduced by 5% its retail store and concession counter space, and it also closed down 23% of wholesale space.

Opex was cut considerably by 15% y/y in HKD terms and 18% in local currency. In local currency terms, marketing expenses were cut by 41%, ‘others’ by 43% and logistics costs by 15%. Staff costs were down by 9%. 

We believe this exercise was long overdue and welcome. We have long highlighted our view that Esprit needs to fix its ‘product’ before it splurges on marketing and store renovations, and we are heartened that this approach is now finally being followed in earnest.

These cuts have saved almost HK$1bn in costs in 1H FY14 alone and helped conserve cash for the future challenges ahead. We note, however, that it is unlikely that overhead costs can be further reduced from current levels, unless there is aggressive further space closure, and that any turnaround in performance from now has to come from the revenue and gross profit lines.