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Prada Earnings Gain 34%

A $20 million tax benefit fueled Prada’s 34 percent jump in its net profits last year, the company’s annual report reveals.

MILAN — Prada’s recently published annual report sheds light on the factors that fueled a 34 percent jump in its net profits last year — namely a $20 million tax benefit.

Prada released its key 2003 figures in March, which showed that net profit grew 34.3 percent to 36.3 million euros, or $41 million, as cost-cutting boosted margins. Prada said the Iraq war, SARS and a strong euro eroded sales by 13.4 percent to 1.36 billion euros, or $1.5 billion.

Dollar figures have been converted from the euro at average exchange rates for the period to which they refer.

But the luxury goods group’s 122-page annual report, a document it has been publishing over the last few years as it flirts with the idea of an initial public offering, states that a 17.7 million euro, or $20.04 million, tax benefit made a significant contribution to its bottom line. In fact, Prada’s pretax profits in 2003 dropped 43.4 percent to 16.1 million euros, or $18.2 million.

Prada attributed the 2003 tax benefit to credit matured on its dividends from subsidiaries and a recent court ruling. Last year, the European Community Court of Justice overruled a Dutch law that stated that costs and interests linked on companies’ European subsidiaries weren’t tax deductible. Prada is registered in the Netherlands and can now deduct such costs.

The report forecast a rosier 2004, citing a “brisk pickup” in sales for the first four months of the year. It said sales in the U.S. grew by more than 25 percent in that period, while tourist-reliant Europe is “showing signs of steady growth.” It also noted 80 percent growth in China and 50 percent expansion in Singapore, places Prada is aggressively targeting with new stores.

As it voiced optimism on the year ahead, Prada alluded to the high-profile departures earlier this year of Domenico De Sole and Tom Ford at Gucci Group, albeit without naming them directly, and the opportunity this might create for Prada and other luxury goods groups.

“One of the sector’s most dynamic and most visionary management teams has decided to step down from the helm of one of the world’s largest luxury goods houses,” the report stated. “With this change, a big opportunity presents itself for the Prada Group, as well as for other global players in the marketplace as each one attempts to capture share in an increasingly competitive market.”

The report also breaks down 2003 group sales by brand. The Prada brand, the largest revenue generator by far, saw its revenues slide 13 percent to 1.02 billion euros, or $1.15 billion. Similarly, sales at younger line Miu Miu declined 14.4 percent to 98.5 million euros, or $111.3 million.

As for the brands Prada snapped up in the luxury goods M&A frenzy of years past, Helmut Lang sales showed the steepest drop in the group. They declined 33.1 percent to 27.8 million euros, or $31.5 million, from 41.6 million euros, or $39.3 million, in 2002.

A Prada spokesman attributed the slide to the macroeconomic factors, namely SARS and the Iraq war, that hit Prada’s consolidated headline numbers, as well as to the shuttering of some Helmut Lang wholesale accounts. He couldn’t specify the number or type of those wholesale accounts, saying only that they “didn’t position the brand as we wanted it to be positioned.” Helmut Lang actually boosted its store count in 2003 to nine directly operated units, including new boutiques in Paris and Milan, and four franchised stores. In 2002, it had nine directly operated stores and no franchised sales points.

As with all the other brands in Prada’s portfolio, a strong euro also bit into Helmut Lang’s numbers.

Jil Sander sales decreased 10.1 percent to 123.4 million euros, or $139.5 million. The financial effect of the German designer’s headline-grabbing return to her label won’t surface until financial results are reported for this year. Its store count grew by one directly operated unit in Sapporo, Japan, during 2003 to 20 directly owned stores and 16 franchised boutiques.

Prada currently owns 97.4 percent of Jil Sander. The Prada spokesman said the remaining 2.6 percent of the company is publicly traded on the German stock market in the form of nonvoting preferred shares. It wasn’t clear since Sander’s return to the label a little more than a year ago whether she held a stake in the company, but a Prada spokesman denied the designer currently holds any shares in the company bearing her name.

The report specifies Prada has built up its Jil Sander stake since the initial acquisition deal was struck in 1999. Most recently, in the period running from April 2000 to December 2003, Prada boosted its stake to 97.4 percent by buying up some preferred shares on the market and acquiring the remaining 25 percent of ordinary shares Sander held, the report specified.

English shoemaker Church’s, in which Prada retains a minority stake following its sale to Switzerland’s Equinox Investments, saw its sales decline 17.2 percent to 50.5 million euros, or $57.02 million. As for the group’s smaller brands, Azzedine Alaïa’s sales more than doubled to 5.3 million euros, or $6 million, while Car Shoe sales slipped from 3.1 million euros, or $3.5 million, to 2.7 million euros, or $2.6 million.

As it snapped up labels, Prada accumulated a debt pile, which it has since worked to reduce. The company has reduced its net financial debt to 680.7 million euros, or $769.2 million, at the end of 2003 from 896.4 million euros, or $948.6 million, at the end of 2002. Prada has said it wants to reduce this figure to less than 300 million euros by the end of the year, but at the same time the company has denied recurring speculation that it’s shopping around some of its smaller subsidiaries to alleviate its debt load.

Prada has been selling some assets, though. It made a gain of 70.7 million euros, or $79.9 million, in 2003 on the sale of a 55 percent stake in Church’s to Equinox, the sale of its eyewear business to Luxottica and various real estate properties in Milan.

Looking at Prada’s geographic exposure, Italy and the rest of Europe continue to make up about half of the group’s annual revenues. Sales in Italy fell 18.7 percent last year to 329.3 million euros, or $372.1 million, while those in other European countries slid 6.4 percent to 361.6 million euros, or $408.6 million. Sales in the Americas lost 16.6 percent to 305.4 million euros, or $345.1 million, while those in Asia dropped 13.3 percent to 347.4 million euros, or $392.5 million.

Other salient bits in the report include those showing that Prada cut its head count by 913 people to 6,001 employees as it boosted efficiency and deconsolidated the Church’s unit. Prada shaved 14.8 percent off its operating expenses to 682.8 million euros, or $771.6 million. Of that total, advertising expenses dropped to 91.2 million euros, or $103.1 million, from 100.9 million euros, or $106.7 million, in 2002.