HONG KONG, Aug 27 (Reuters) - Shares of Esprit (0330.HK) fell more than 14 percent to a seven-week low on Thursday 27 August after the world's No.6 fashion retailer by market value posted a worse-than-expected drop earnings, and as it forecast continued weakness in its wholesale orderbook.

Esprit 'Incan Style' - Photo: www.esprit.fr

HSBC (0005.HK) downgraded Esprit to "neutral" from "overweight" after the fashion group posted weak results on a very weak wholesale environment in Europe and lacklustre growth in retail.

But HSBC forecast that Esprit's sales and margins would gradually normalise, with the fashion group focusing on core markets in the U.K., France, North America, and Australia.

Esprit, the third most heavily traded stock following China Life (2628.HK), fell to as low as HK$51.40 in late morning trading with HK$766 million worth of shares changing hand.

Esprit, which competes with Hennes & Mauritz (HMb.ST) and Gap (GPS.N) and derives nearly half of its retail turnover from Germany, on Wednesday 26 August posted a 40 percent drop in second-half profit and a 26.4 percent fall in full-year profit, lagging the market average estimate, as global economic woes took a bite out of its core European market.

Morgan Stanley (MS.N) downgraded Esprit to "equal weight" from "overweight" and said the results were disappointing as wholesale revenue showed a steeper drop-off in the second half and the near term outlook remained weak, especially with wholesale orders to December 2009 down. "We still feel Esprit should emerge from this downturn in better shape versus peers, earnings downgrades and a near-term weak outlook will likely put pressure on the stock..." said Angela Moh, analyst from Morgan Stanley, in a research note.

However, some brokers took a more positive view on Esprit.

Goldman Sachs upgraded Esprit to "neutral" from "sell", saying the stock's valuation had come down to a reasonable level and bottoming fundamentals in Europe suggest Esprit should emerge from the cyclical trough going into the first half of next year, which could lend support to the share price in the near term.

But uncertainty surrounding new management execution, and structural deterioration as Esprit shifts into the lower-return retail business remain a concern, Goldman added.

Esprit's shares have been under pressure on concern over its earnings outlook in core markets in Europe, in particular Germany, which constitutes half of its revenue, and also after a management reshuffle.

"The operational backdrop that Esprit described is not any different from what it described before ... and it is quite clear that management is bracing for the operational headwinds over the past 12-18 months to continue in the next six to nine months," said Marisa Ho, an analyst at Credit Suisse, in a research note.

Credit Suisse maintained Esprit at "outperform". (US$1=HK$7.75) (Reporting by Donny Kwok; editing by Chris Lewis)