Prada’s Patrizio Bertelli Talks Expansion and Growth

MILAN — New projects and future challenges are adding a spring to Patrizio Bertelli’s step.

The Prada Group chief executive officer was keen to illustrate investments in manufacturing, product diversification and retail expansion at an almost four-hour meeting with investors and the press in Milan on Wednesday — during which he repeatedly used the word “fun” to describe his job and the group’s activities.

Profits in the year ended Jan. 31 totaled 627.8 million euros, or $835.7 million, up 0.3 percent compared with the previous year. Although boosted by global growth at its retail channel and solid gains at the signature brand, profits were dented by foreign exchange losses and a greater tax burden.

As reported in February, revenues totaled 3.58 billion euros, or $4.76 billion, an 8.8 percent gain compared with the previous year.

All dollar rates are calculated at average exchange rates for the period in question.

The Prada brand was up 11.1 percent, especially in the retail channel where it recorded one of the highest rates of growth in the sector, up 19.6 percent at constant exchange rates.

Chief financial officer Donatello Galli was prudent on like-for-like growth in 2014, as February was “negative for bad weather in the U.S. and geopolitical situations in Europe. It’s difficult to read the rest of the year, a high-single-digit growth seems satisfying.”

Guidance for 2014 included 9 percent sales growth; 80 openings already budgeted; at least a 3 percent like-for-like growth, and operating profit margins in line with 2013. Guidance for the 2015-16 period included 11 percent top-line growth; 55 new stores; 5 percent like-for-like growth, and improved operating profit margin.

But Bertelli was much more interested in talking about product and expansion than the mere numbers. “I dedicate 60 percent of my time to product,” he said. “That has not changed over the years — product is the starting point and finance comes after. I never want to lose sight of this and I strive to remain curious, if you take curiosity and imagination away, there’s no use for people like me.”

Reflecting this attitude, Bertelli brimmed with energy as he and the group’s executives outlined plans for the next three years, which include investments in manufacturing in Italy and England; setting up a technical school; the development of the group’s Car Shoe and Church’s lines, including the launch of accessories and ready-to-wear for the latter; a push in men’s wear, and the opening of Marchesi pastry shops within Prada stores and Epicenters, as well as selected shopping malls.

With the exception of the famed Marchesi bakery, which the group took control of last month and which is known for its Milanese panettone, Bertelli emphasized growth in the next three years will be organic rather than through acquisitions.

“There are substantial growth margins and we don’t want to distract resources from our internal work.”

Bertelli underscored the relevance of Made in Italy craftsmanship and the group’s manufacturing skills, views echoed by Lorenzo Panerai, leather goods industrial division director, who said the group’s “know-how and full control of the entire value chain gives Prada a competitive advantage.”

New industrial headquarters in Tuscany designed by Guido Canali that will cover 356,400 square feet will be completed by the end of the year. “The building emphasizes Italian craftsmanship of our brands,” Bertelli said. The company controls 11 production facilities in Italy and one in the U.K., dedicated to Church’s, and plans to invest in four additional factories in Italy for a total of 864,000 square feet and 700 employees by the end of 2015.

Prada’s new Technical Academy for high-end products will open in 2015 in Tuscany, each year accommodating about 60 students aged 16 to 21 and offering specialist training programs by product category, a diploma and an opportunity to work in the company on the manufacturing process.

The group is also looking at boosting production in England. Stephen Etheridge, ceo of Church & Co. Ltd., said the famed English footwear brand is acquiring a larger building next to the existing factory and opening new headquarters in London, with plans to expand the product range with rtw and accessories, all made in the U.K. “It’s a commitment, but it’s fun,” said Bertelli. “I’ve done so many different things, so it will be a great pleasure to do this in England.”

A new format flagship will open in London in the second half of 2015. As of the end of January, Church’s had 52 stores. Etheridge said the brand is targeting sales of 250 million euros, or $344.6 million, in five years. In 2013, Church’s sales totaled 68.6 million euros, or $91.2 million at current exchange, in line with the previous year.

Similarly, Bertelli pointed to the development of the Car Shoe brand. “We have not had much time to dedicate to the development of Car Shoe, which is handmade and we want to emphasize its heritage, as it was founded in 1963, and its women’s division, but we will now focus on developing both its wholesale and retail channels,” he said. In 2013, revenues of the label decreased 32 percent to 13.4 million euros, or $17.8 million.

Further investments in the Miu Miu brand with the expansion of its directly operated stores, boosting communication and marketing, and the launch of its first fragrance in 2015, are also pillars of growth, said Maria Cristina Lomanto, Miu Miu retail director. Miu Miu can reach sales of 800 million euros, or $1.1 billion, in 2016 and will benefit from positive operating leverage from 2015 onwards, she said. In 2013, Miu Miu grew 1.2 percent, reaching sales of 519.1 million euros, or $690.4 million.

As of the end of January, Miu Miu had 150 boutiques, “still fewer than its main competitors,” said Lomanto, adding that 70 stores will open in the 2014 to 2016 period. Bertelli said “a change” in the pace of development is taking place now, without elaborating. “We don’t hide that it’s Miuccia [Prada] designing it, it’s not a look-alike taking a bow on the runway,” said Bertelli, responding to an analyst’s question. “But she has two separate work groups, from commercial to product and retail, and Miu Miu is the true competitor of Prada. The best fun is when Miu Miu competes with Prada.”

Growing Prada’s men’s business is also a priority. The company will open 120 stores in the 2014 to 2016 period, of which 50 will be men’s. Currently, men’s wear is sold in about 220 stores, of which 30 are dedicated to men only. In 2013, men’s wear sales reached 800 million euros, or $1.06 billion, accounting for 25 percent of total sales. Giulio Brini, retail director, underscored this category’s “strong potential,” targeting a growth of 1.5 billion euros, or $2.06 billion at current exchange, in three to five years.

The group is eyeing overall expansion through online sales, especially in the U.S. and the Far East, but Bertelli underscored that it will be managed and produced in-house, expressing concerns that outside providers and platforms are involved in the gray market. The latter is also the reason the group has been cutting back on its wholesale distribution. “This is the only way to defend our business. I don’t want to sound mean, but things must be said,” noted Bertelli, adding that the company forfeited sales of about 200 million euros, or $275.7 million, through dropping of some wholesale clients. Bertelli was also quick to point out that business with qualified and established wholesalers, such as department stores, was brisk. Prada is turning about 40 points of sale into directly operated concessions, including 20 last year, and Bertelli said sales “even more than doubled” through this channel.

Addressing currency headwinds, Bertelli cautioned against “looking at currencies.” He said it’s “hysteria” to try and recover currency changes with price increases. “To have a purely financial vision is hara-kiri from a commercial point of view. We must evaluate different commercial aspects in different countries and we must know how to work well also when currencies are not favorable.”

Galli said the second half of 2014 will be “better in terms of currency headwinds, but we expect worse exchange rates than in 2013.”

In 2013, the retail channel accounted for 84.5 percent of sales, generating sales of 3 billion euros, or $4 billion, up 12.5 percent on the previous year, thanks to new openings and a 7 percent like-for-like growth. At the end of January, directly operated stores totaled 540 units, compared with 461 at the end of January the previous year. These included 330 Prada units, 150 Miu Miu stores, 52 Church’s stores and eight Car Shoes.

The wholesale channel saw a 6.9 percent decrease in sales to 551.6 million euros, or $733.6 million, affected by the ongoing trimming of accounts in Europe and by the conversion of retail corners in U.S. department stores into directly operated stores.

Sales in Europe grew 4.8 percent, accounting for 22 percent of the total. Italy was up 5 percent, representing 16 percent of total sales. America grew 11 percent and was 14 percent of total. Asia-Pacific was up 11.4 percent, representing 36 percent of the total. Greater China strongly contributed with sales of 826 million euros, (up 14.7 percent at constant exchange rates).

Japan continued to grow and was up 23.6 percent at constant exchange rates. However, at current exchange, it was up 1 percent, hurt by the weakness of the yen. The region accounted for 10 percent of sales. Revenues in the Middle East almost doubled to 91.1 million euros, or $121.1 million.

Capital expenditure totaled 611 million euros, or $812.6 million, aimed mainly at retail development. Galli said there will be an investment of between 400 million and 450 million euros, or $532 million and $598.5 million, in the supply chain.


STRAIGHT FROM BERTELLI
Here, select quotes from Patrizio Bertelli’s effusive news conference:

• “India will be a great outlet when it will have overcome [the] issue of logistics. China did it and quickly in eight years.”

• “Holding the role of president was too time consuming for Miuccia. She has always been co-ceo, it was just made official. She is my right hand in this function and she is the boss in style.”

• “I have never worked to be famous. Wealth is not an objective, it’s secondary. Intellectual freedom distinguishes us, our mentality that is not in line with banality.”

• “I am not thinking of buying suppliers of raw materials. This can be limiting if you want to have access to other products. We would rather have tight relations with manufacturing plants but be autonomous.”

• “The Russian market is 30 percent up in this moment, since the beginning of the Crimea crisis.”

• “We have not been thinking of selling other shares, but it is not an idea to be discarded in the future. We could think of placing 5 percent on the market.”

• “Not many people wonder what will happen in 20 years. I think about it every day. To last, one must be very structured industrially. It’s not only about marketing. Church’s exists only because it has maintained its know-how and workers for more than 100 years. We must combine numbers and substance.”