The revenue of Esprit Global (HK$4.80, unrated) declined 10.4% year over year to HK$15.94 billion. Net profit rose slightly to HK$67 million (HK$21 million for the same period last year). Gross margin rebounded slightly during the period, rising to 51.6% from 50.2% in FY16, but the company still recorded a loss before interest and tax (LBIT) of HK$102 million (HK$596 million in the same period last year). Earnings per share were HK$0.03. In local currency, the company's revenue fell by 9%, reflecting the fact that the company still faces significant challenges in starting sales activities. Operating loss for the second half of FY17 was HK$79 million, compared to HK$13 million in the first half of FY17. However, considering factors such as the company's rising e-commerce sales, the gradual effects of cost control measures, the holding of HK$5.2 billion in cash, and the rise in the euro exchange rate, the company may experience a recovery. Given the disappointing performance of the company in the past and the slow recovery, it may take time for the market to rebuild confidence in the company. The company's recovery will depend heavily on the pace of the recovery in German business revenue (the region accounts for 50% of the company's revenue), the speed at which management shrinks physical stores, and how the company allocates cash on hand. The performance of various sales channels has been divided. Over the past few years, Esprit Global has continued to close some loss-making physical stores, and as a result, the revenue scale has declined sharply (2011 revenue exceeded HK$34 billion). This downward trend continued in the last fiscal year, with revenue falling 8.7% (in local currency). Brick-and-mortar retail still accounts for 42% of total revenue, e-commerce accounts for 25% of total revenue, and the remaining 32% comes from wholesale. The company's revenue is still very concentrated in Europe, with 87% of revenue coming from Europe, of which Germany accounts for nearly 50%. The company's gross margin rose to 51.6% (50.2% in the previous fiscal year). Recurring operating expenses also declined from HK$9.5 billion to HK$8.4 billion, a decrease of over HK$1 billion. LBIT was HK$102 million, down from HK$596 million in the previous fiscal year. The profit performance during the period also benefited from sales proceeds of HK$731 million. The following chart of EBIT distribution illustrates the problem: retail business is the main cause of losses. The company said it will continue to close physical stores, particularly in Asia, where five local stores account for about 70% of losses. As the company continues to close retail outlets (particularly loss-making stores), we believe its revenue for FY18 will continue to decline. This means that gross margin will also improve slightly, partly due to an increase in e-commerce's profit contribution (e-commerce's profit margin is higher). Company background The company's shares are mainly held by institutional investors. The top 15 asset management companies with the most shares own 70% or more of the company's shares. The stock price of Esprit Global has fallen by more than 90% over the past 10 years, and the number of sell-side analysts covering the company has been drastically reduced, mainly due to the continued decline and disappointment in the company's performance over the past few years (EBIT of HK$547 million in FY14). The company has been striving to keep up with market trends and revitalize the brand. The results have been mixed, but progress has been too slow. Despite this, the company's cash position is good, with net cash exceeding HK$5 billion and has restructured its cost portfolio. Valuation Although Esprit Global's stock price has rebounded slightly over the past few months, it is still down 21% year to date. Judging from the 2017/18 price-earnings ratio, the current valuation is still expensive. However, we believe that a simple price-earnings ratio analysis may ignore the following factors: (1) the increase in e-commerce sales; (ii) the impact of further store closures and other cost control measures; (iii) its cash holdings of HK$5.2 billion; (iv) the increase in the euro, and a 5% increase in EBIT will lead to an increase of HK$250 million in EBIT. This means the company's EV/EBITDA could drop to 7-10 times over the next 12-18 months.