(Reuters) - Europe-focused clothing retailer Esprit Holdings (0330.HK) posted a 21 percent fall in first-half net profit and will switch its textile sourcing to Bangladesh from southern China to cut costs.

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Esprit, like rivals such as the world's No.3 fashion retailer Hennes & Mauritz (HMb.ST), faces the challenge of rising raw material costs, such as cotton, which will pressure sales of budget clothing chains.

"We have identified the opportunities to diversify our portfolio in different countries. One of the countries that we have identified is Bangladesh," Esprit's Chief Executive Ronald Van der Vis told a news conference.

"We will open selectively new sourcing offices in future in markets where we believe there are opportunities for us."

Esprit shares ended down 0.3 percent.

The interim dividend was lifted to HK$1 from HK$0.74.

The apparel retailer, Asia's third largest by market value, also plans to set aside HK$1.3 billion in capital expenditure in the second fiscal half, with an aim to increase retail selling space by 5 to 10 percent for the full fiscal year.

SOME IMPROVEMENT IN WHOLESALE

Esprit, whose competitors include Swedish clothing retailer Hennes & Mauritz (HMb.ST), U.S. group GAP (GPS.N) and Spanish group Inditex (ITX.MC), posted a net profit of HK$2.14 billion ($275 million) for the six months to end-December.

The result was slightly lower than an average estimate of HK$2.16 billion from five analysts polled by Reuters.

"Though it showed some improvement in wholesale, the overall earnings growth was still slowing down. I won't pay a premium to buy the stock," said Patrick Yiu, a director at CASH Asset Management. "The management has to put more effort to make a change."

Rising raw materials prices and labor costs will likely pressure margins and hence Esprit has decided to cut costs by increasing sourcing its textiles from other countries, such as Bangladesh, instead of China where costs are climbing, it said.

However, Esprit, which currently derives 80 percent of its sales from Europe, hopes to rely more on the Chinese market for growth.

Esprit, which sells everything from bed sheets to jeans, saw revenue from its retail business rise 8.7 percent in local currency during the six-month period. Excluding China, retail turnover growth was largely flat in local currency terms.

Same store sales in China are picking up, growing by an annual 0.5 percent in the first half, against an 8.5 percent drop a year ago.