I.T., a Hong Kong-based fashion retailer with outlets throughout China, said its net profits for the first half of the current fiscal year dropped 66 percent because of additional marketing expenses and the poor financial environment.

The company's net earnings fell to HK$15 million during the six months ended August 31 despite a 46 percent increase in revenue.

"The increase was due to both growth in the retail sales of its Hong Kong operations and the consolidation of its mainland operations," William Lo, vice chairman and managing director of the company, said at a press conference yesterday.

Gross profits increased by 53.6 percent to HK$717.5 million while the gross margin of retail operations was 60.7 percent, slightly lower than last year's 60.8 percent.

The mainland market made a significant contribution to the company's revenue in the first half, accounting for 20.4 percent of the group's total retail sales.

"As the mainland is growing much faster than Hong Kong, we expect this percentage to increase," Lo said.

In the first half, international brands remained the group's key revenue contributor, accounting for nearly 50 percent of total retail sales, while in-house brands accounted for 45.7 percent of total retail sales.

The company expects its in-house brands to continue growing, which would help improve its overall gross profit margin.

During the first half, I.T. opened 11 more stores on the mainland and in Macao. The company is currently operating 178 shops in Hong Kong and 140 outside the city.

To manage the company's business expansion on the mainland, I.T. has hired more staff at its corporate headquarters in Hong Kong, raising staff costs by 21.4 percent.

However, the fashion retailer plans to gradually reduce its staff to prepare for an economic recession in the next year or two.

"We have started to freeze our staff in the last two or three months," Lo said, adding that the company cut around 80 employees at its Hong Kong headquarters two months ago. Around 370 employees currently remain at the headquarters.

Looking ahead, the company will take a more cautious view and a more defensive strategy toward its Hong Kong business over the next six to 12 months, given the likely softening economy amid the global financial turmoil.

"We will tune down our capital expenditure for the next 12 to 18 months, while some less profit-making stores will be gradually closed down," Lo said.

Concerning the mainland market, the fashion retailer remains cautiously optimistic, and more resources will be allocated to the region.

"We believe the central government policy to stimulate the domestic consumer market will be effective to support our business growth on the mainland," Lo said.

(HK Edition 10/31/2008 page2)