By  on June 5, 2014

MILAN — Prada SpA is in transition — and its profits are feeling the impact.

The luxury fashion house on Thursday reported a 23.8 percent drop in net profits for the first quarter, hit by currency headwinds and the rationalization of its wholesale channel. Chief executive officer Patrizio Bertelli and the group’s management are taking the sharp decline in stride, though, saying it stems from the company’s already-outlined plans for a year of consolidation.

“When presenting our results for 2013, we stated that our objective for 2014 would be to consolidate the position of the Prada Group at the top of the luxury goods segment with industrial, marketing and retail investments, primarily aimed at reinforcing business know-how, the quality of our products and relations with our customers,” said Bertelli.

During a conference call with analysts, chief financial officer Donatello Galli echoed the ceo’s sentiment, saying that projections for the end of the year “will not be very different from 2013,” citing the introduction of new products, a focus on subsidiaries and cost-cutting measures.

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“We cannot forget that in the past few years, Prada outperformed the market, with a growth of more than 64 percent in leather goods in the past two years, and now [this category] is broadly in line [down 2.6 percent] with the first quarter last year. We are in a natural consolidation phase,” said Galli.

The leather goods market, the executive noted, is “more crowded than in the past,” and the group is “pushing” and further developing the apparel and footwear divisions, as well as its successful men’s wear. Prada has been aiming at a more balanced product portfolio, pushing innovation across the board, he added. Apparel and footwear in the first quarter showed growth of 14.1 and 16.2 percent, respectively.

In the three-month period ended April 30, the group posted net profits of 105.3 million euros, or $144.2 million, compared with 138.2 million euros, or $181 million, in the same period the previous year.

Revenues decreased 0.6 percent to 777.7 million euros, or $1.06 billion, from 782.3 million euros, or $1.02 billion. At constant exchange, revenues would have grown 3.8 percent.

Figures are converted at average exchange rates for the three-month period to which they refer.

“We do not believe that the current difficult macroeconomic environment, made all the more complex by unfavorable foreign exchange trends, will impact the plans for corporate growth presented to the market as these plans are geared towards the group’s expansion in the medium [and] long term,” continued Bertelli. “The trend of solid growth maintained in the retail channel confirms that we have made the right strategic decisions and encourages us to continue along our current path.”

In the quarter, the 551 directly operated stores generated sales of 697.8 million euros, or $956 million, up 2.8 percent on the same period last year.

Galli said that the strategy of wholesale rationalization, which affected the first quarter the most, will be completed in 2014 and that it has led to a 24.7 percent fall in wholesale sales, in line with expectations, touching all product categories and mostly influencing the Miu Miu brand.

In the period, operating profit dropped 20.1 percent to 156.3 million euros, or $214.1 million, representing 20.1 percent of sales.

Earnings before interest, taxes, depreciation and amortization decreased 11.2 percent to 213.9 million euros, or $293 million, and 27.5 percent of sales.

The contribution to margins of apparel and footwear will increase in the long term, said Galli, who declined to provide a general forecast on margins, saying he needed “more time,” given the limited visibility.

In his first call since his appointment as chairman of the company in February, Carlo Mazzi said Prada will “pick up, in line with 2013,” and pointed to “the reorganization of the firm, with a new global direction for operational, marketing and communication, and all activities of business development.” He reiterated that, last week, the company promoted its communication and external relations director Stefano Cantino to a new position overseeing marketing, communication, license management and new business. He will also be responsible for the wholesale and e-commerce channels.

Mazzi highlighted how the group plans to “improve [its] little brands, Church’s and Car Shoe,” mirroring Bertelli’s comments in April during a meeting with investors and the press. In the first quarter, Church’s, with sales of 10 million euros, or $13.7 million, was up 13.5 percent, while Car Shoe revenues of 1.5 million euros, or $2 million, decreased 4 percent.

Sales of the Prada brand rose 2.8 percent to 584.8 million euros, or $801.2 million, posting “excellent” performances in Japan and the Americas. The company underscored the “excellent” results achieved by all categories of men’s products.

Miu Miu was up 1.9 percent to 101 million euros, or $138.3 million, in all geographical areas except Italy, and logged double-digit growth in relevant markets such as Asia-Pacific, the Americas, Japan and the Middle East. Galli said the evolution of Miu Miu is “still not finished, definitely products have and will be changing, and we have done very effective merchandising. We are more confident. While in some areas it is still lacking the same awareness of the Prada brand, in others it’s doing even better, in Russia, for example.”

Galli pointed to the need for the group to fully understand an evolving market and changing consumer spending patterns, taking “a more comprehensive approach to merchandising, not only in a strictly operational way, but integrating communication and promotion.”

Asked by one analyst about flash collections, Galli said the company is making changes. “They are a very important part — one-third of sales, but even this concept will be new in the future. We are moving towards a continuous, more flexible approach to merchandising. While I’m not saying we invented it, we were the first to extensively do flashes, but now we are working on a concept to differentiate merchandising, which is what markets want; the lifespan [of fashion] is short,” he said.

At the group level, sales in the Asia-Pacific area inched down 1.2 percent to 286 million euros, or $392 million, but would have showed a 4 percent increase at constant exchange rates. The performance of this area was affected by a slowdown in South Korea, Hong Kong and Singapore, while China, Macau and other Asian markets continue to show healthy rates of growth. Galli said Mainland China was still a “ very positive market” for the group, with a high-single-digit growth rate.

“The movements of the Chinese are very important,” said Galli. “We are seeing less tourist spending in Europe, and this is also affecting Hong Kong more than in the past. The composition of travelers and consumer spending patterns are different, raising questions and opportunities for company.”

Also, Hong Kong is “physically changing with new shopping areas, occupancy rates in hotels are declining on holiday occasions, and daily trippers are shopping in a different way,” he noted, adding that increasing competition and the high exposure of brands “can be saturated” in that market.

Singapore and South Korea were affected by drops in Chinese and Japanese spending. “We are largely dependent on what Chinese travelers are doing,” said Galli. Taiwan and Thailand are also performing well, despite political troubles in the latter. Macau is “resilient to any changes, always extremely positive.”

Despite harsh weather conditions, the Americas reported a 9.5 percent gain in retail sales to 82.1 million euros, or $112.4 million.

Revenues in Europe were in line with the same period last year, up 0.2 percent to 213.9 million euros, or $293 million, affected by a slump in tourism due to the further strengthening of the euro and geopolitical problems in Russia.

Despite the weakening of the yen, Japan continued to “perform extremely well” showing 17.1 percent growth to 92 million euros, or $126 million.

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