Hong Kong: Esprit Holdings Ltd, Asia’s No.3 apparel retailer, said on Thursday it is looking to China as its next growth engine, aiming to double sales there in five years as its core European market remains uncertain.

The company blamed tough conditions in Europe, which accounts for more than 80% of sales, as its second-half earnings missed forecasts with a 19% fall, sending its shares down 3% in a firmer Hong Kong market.

“A weak results had longed been expected, but the actual outcome was even below what we expected," said Renee Tai, an analyst at CIMB-GK Research.

“However, the company is still promising due to its China’s plan which can help to offset an uncertain European markets."

Esprit, which competes with the likes of Hennes & Mauritz AB, Inditex SA, and GAP Inc, said it was planning to expand to over 400 cities in China, from about 160 now, through franchising.

“We are just about to go into the acceleration of the growth phase," CFO Chew Fook Aun said. “What do we want to do? As I said very ambitious plans, at least double the turnover in five years."

The aggressive China plans contrast sharply with Europe, where consumer confidence remains shaky.

“The governments in Europe are facing tremendous budget deficits, and they are cutting budgets like crazy. Same-store sales in European countries are still kind of challenging. North America is doing better, but is still volatile," CEO Ronald Van Der Vis told a media briefing.

Europe generated about HK$28 billion in sales, or 83% of Esprit’s total for its fiscal year through June 2010, down 4.6% from a year ago. Asia Pacific, including China, accounted for 14% at HK$4.6 billion, up 11.5%, and North America accounted for 3% at HK$1.08 billion.

Esprit said it had earmarked HK$2.2 billion for capital spending in the new financial year to open about 100 new stores as well as expanding and refurbishing existing stores.

The company said it planned to expand the overall volume of retail selling space by 5-10% in the fiscal year ending June 2011.

Earnings Lag Forecast

Esprit posted a worse-than-expected 19% fall in second-half profit amid slower sales growth and euro weakness, and said the wholesale market will remain challenging to the end of calendar 2010.

“We expect the wholesale market environment in the first half of the new financial year to remain challenging," the company said in a filing to the Hong Kong bourse.

Analysts said the lower euro and weak wholesale business had offset retail sales growth, affecting earnings. The appreciation of the yuan and soaring rental and labour costs in Asia could impact profit margin in the year ahead.

Esprit posted a net profit of HK$1.53 billion ($196 million) for the second half of its fiscal year ended June, down from HK$1.89 billion a year earlier.

The result lagged an average estimate of HK$1.73 billion from 13 analysts polled by Thomson Reuters I/B/E/S.

Esprit reported a net profit of HK$4.23 billion for the fiscal year ended June, against a consensus forecast of HK$4.439 billion and a year-earlier profit of HK$4.745 billion.

Shares of the company have fallen about 17% so far this year, compared with a 4.6% fall by the Hang Seng Index. The stock ended down 3% on Thursday after the results came out.