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Retailer Esprit seeks speed to return to fashion

A shirt made by Esprit is displayed at one of its outlets in Hong Kong August 7, 2012. REUTERS/Bobby Yip
A shirt made by Esprit is displayed at one of its outlets in Hong Kong August 7, 2012. REUTERS/Bobby Yip

By Donny Kwok

HONG KONG (Reuters) - Fast fashion, even faster. That's the next target Esprit Holdings' <0330.HK> CEO Jose Manuel Martínez Gutiérrez is aiming for as the Zara-brand veteran steers the Hong Kong-based clothing retailer through a $2.3 billion turnaround.

When Esprit brought in Martinez from Zara's owner Inditex last year, investors gave him a resounding vote of confidence and drove Esprit shares to notch their biggest one-day gain in 14 years.

He has so far cut inventories, brought in four of his former Zara colleagues and announced plans to shut down 16 Esprit stores, mainly in Europe, this fiscal year while maintaining a strong presence in China.

Martinez now plans to slash by a third the time it takes for new products to hit the shelves by simplifying distribution, one of the hallmarks of his tenure at market leader Inditex.

"This is a business which is not rocket science, the magic is if you keep it very, very simple, then it will become very, very effective," Martinez told investors in May, after the company warned of a second-half loss related to store closures and acquisitions in China.

He said clothing should reach stores within 2-3 months of manufacture, and not within 6-9 months, a strategy analysts said could help make Esprit more competitive, but not any time soon.

The company is expected to report its first full-year loss in two decades when it posts fiscal 2013 results on Tuesday, and some analysts said the new management still had its work cut out for it to revive the brand.

"The new management has yet to demonstrate to the market that a revolution is under way," said Steve Chow, analyst at Sunwah Kingsway Group Research.

"Shops are still lacking traffic flow and the brand has not yet come up with a fresh image."

EYES ON EUROPE

Esprit has been trying to revive its image since it reported a 98 percent drop in profit for the first half of 2011 and admitted the brand had "lost its soul".

The company is struggling with sluggish demand in austerity-hit Europe, which accounts for about 80 percent of its revenue, and competition from Gap Inc and Uniqlo, the flagship of Japan's Fast Retailing Co Ltd. <9983.T>

Signs of an economic pick up in Europe, however, are cheering investors, analysts say.

Consumer confidence in Germany, which accounted for nearly 44 percent of sales in the six months ended December, is near a six-year high and July retail sales rose a real 2.3 percent year-on-year, against a 2.4 percent drop in June and 0.8 percent fall in July last year.

"They (investors) are now betting on Europe. They have high hopes that Esprit can benefit if its major markets in Europe do turn around in 2014," said Alex Wong, a director at Hong Kong-based brokerage Ample Finance Group.

Martinez has already managed expectations for a quick-fix, and investors appear to be willing to give him time: Esprit shares have gained about 37 percent since Martinez's appointment was announced on August 7, 2012, nearly three times the percentage gain in the benchmark Hong Kong index <.HSI> during the same period.

When asked how long it would take to see signs of a turnaround, he told a briefing in May: "A bit longer. Improving our performance is going to be progressive but it is going to take some time." ($1 = 7.7562 Hong Kong dollars)

(Editing by Anne Marie Roantree and Miral Fahmy)

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