The news: The top two executives at Hong Kong-listed clothier Esprit Holdings resigned this week, leading the stock to decline 32% Wednesday and Thursday before rebounding nearly 10% by today's market close.
The significance: The resignations add to what has already been an intensely volatile year for Esprit on the Hong Kong Stock Exchange. At the end of February, shares in the retailer were up 75%, the largest gains of any stock on the Hang Seng Index. Investors apparently had faith in the turnaround plan: Esprit was to close all stores in its original home market in the US, maintain its Europe operations and focus on rapid expansion in China. Even CER Alpha thought the plan just might work when we advised closing out our short position on May 10 after the company recouped US$900 million in a writeback on the North America closures and showed small same-store sales gains. We spoke too soon as the company now appears less likely than ever to succeed. Esprit lacks clear leadership with a lame duck CEO who could stay on for up to a year. The company's market in Europe is stagnating and in China is slowing. In addition, Esprit faces an uphill fight in its chosen battleground of China, where it seems unlikely to make gains on competitors like H&M, Gap and Zara that have strong positions and brands.
The takeaway: Investors might consider selling or shorting Esprit Holdings (0330.HKG) as the stock could come down further in the face of a negative external environment and lack of clear leadership.