Esprit closed 9.5pc lower yesterday, the worst drop since August 8, after dropping as much as 17pc during trading hours.
The company said on Tuesday that sales fell 2pc in the fiscal quarter ended September and that it will offer investors the right to buy one new share at HK$8 each for every two held.
The clothes company admitted last year that its brand had "lost its soul".
It has missed earnings estimates for five straight years and lost customers to rivals such as Zara.
Chief executive Jose Manuel Martinez Gutierrez took over in September after the previous CEO and chairman quit within 24 hours of each other earlier in 2012. "The market will likely see this as an early attempt to raise cash at a level deemed attractive by management, which implies things could get worse before they get better," Peter Williamson, head of research at Religare Capital Markets, wrote in a note.
"What would we do with the shares? Be cautious, sell the shares and let the dust settle."
The Hong Kong-based retailer said the funds raised will be used to finance efforts to revive its brand. No more than 656 million rights shares will be issued, Esprit said on October 22.
The company's stock traded at HK$11.26 at the close in Hong Kong, trimming its gain this year to 12pc. The benchmark Hang Seng Index climbed 18pc this year. Hong Kong markets were shut yesterday for a holiday.
"This move is a surprise to us, as we were believers in the rising probability of success of the transformation plan as it was based on the green shoots seen in the preliminary feedback," Mr Williamson wrote.
Excluding store closures, Esprit sales declined 11pc on a local-currency basis, the retailer said. First-quarter sales declined 0.2pc on a comparable basis.
That was an improvement from an 8.5pc comparable sales decline in the year earlier first quarter.
Esprit doesn't have plans for further fundraising and will stick to the existing budget of HK$18.5bn for its transformation strategy, chief financial officer Thomas Tang told reporters on Tuesday.
Esprit will see "a slow turnaround," Mr Martinez said on the same call.
The Hong Kong-traded apparel company was established in 1968 in San Francisco, when Susie and Doug Tompkins started selling clothes out of their car. (Bloomberg)