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Own Retail Drives Prada’s Growth

Company posted a 13.5 percent increase in net profits in the first quarter, lifted by its retail division and growth in the Asia-Pacific and the U.S.

Prada RTW Fall 2013

MILAN — Prada SpA posted a 13.5 percent increase in net profits in the first quarter, lifted by the strong performance of its retail division, and growth in the Asia-Pacific and the U.S.

This story first appeared in the June 12, 2013 issue of WWD.  Subscribe Today.

In the three-month period ended April 30, the Italian luxury firm’s net profits climbed to 138.2 million euros, or $181 million, compared with 121.7 million euros, or $160.6 million, in the same period the previous year. Revenues gained 13.9 percent to 782.3 million euros, or $1.02 billion, from 686.7 million euros, or $906.4 million.

Figures are converted at average exchange rates for the three-month period.

“In an international economic environment that remains extremely volatile and uncertain, the Prada Group has recorded another highly positive quarter, continuing along its path of development founded on solid and lasting growth,” said chief executive officer Patrizio Bertelli. “In 2013, we will again concentrate on the international expansion of our retail network but without moving away from tight control over costs and working capital, also in order to safeguard our cash-flow generation.”

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Earnings before interest, taxes, depreciation and amortization climbed 20.4 percent to 240.8 million euros, or $315.4 million, representing a margin of 30.8 percent on revenues.

“We are working on understanding where the market is going, but we remain confident we can reach a high-single-digit same-store sales growth in the year,” said chief financial officer Donatello Galli during a conference call with analysts. Galli touched on a number of subjects, ranging from Italy’s difficult market and Japan’s rebound — which he called “the real surprise” — to the streamlining of wholesale accounts in Europe, and the challenges such a difficult economy poses to the expansion of a brand like Miu Miu.

In the first quarter, retail sales grew 19.1 percent to 678.7 million euros, or $889.1 million, and accounted for 88 percent of total revenues. Wholesale sales dropped 9.4 percent to 93.9 million euros, or $123 million, as a result of the more selective distribution.

As of April 30, the company had 462 directly operated stores.

Geographically, the Asia-Pacific market grew 24.8 percent, a performance boosted by China’s network of stores, and accounted for 41 percent of sales. While expressing satisfaction over business in China, Galli said there was one exception in the area: South Korea, which is “not doing well for reasons outside our control,” pointing to the country’s political issues.

The Americas gained 23 percent, representing 12 percent of sales, but the wholesale channel and department-store businesses also performed well in that market, said Galli. In the U.S., Prada is converting a significant number of wholesale accounts in department stores to direct concessions. “This gives us a grip on the market and more consistency,” explained Galli. There will be another 15 to 20 conversions in the U.S. during the rest of the year.

Sales in Italy dropped 8 percent to 101.4 million euros, or $132.8 million, accounting for 13 percent of revenues. “This is not the right moment to think of a rebound. We hope Italy will improve in the second half, but we remain prudent. There is volatility in the market and not one direction that has expressed itself yet,” remarked Galli. “We cannot expect Italians who are being careful about domestic consumption to spend on discretionary goods, and we cannot expect to see the growth of tourists at the same rate as before.”

The rest of Europe was up 7 percent to 158.3 million euros, or $207.3 million, representing 21 percent of sales. Business in the continent continued to be boosted by the flow of tourists, who “are skewed towards leather goods accessories,” said the executive, a fact that is affecting the performance of apparel and footwear. Galli also said bad weather over the last few months impacted those two categories.

Globally, the leather goods division grew 29 percent, accounting for almost 70 percent of sales. Apparel and footwear, which are more exposed to the wholesale channel, recorded a drop in revenues of 5.1 percent and 12.2 percent, respectively. Ready to wear accounted for 14 percent of sales, and footwear for 15 percent of sales. Galli said there are no plans to expand in other product categories.

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The continued recovery in luxury spending in Japan resulted in a 12.2 percent increase in sales at constant exchange rates, though the weaker yen resulted in a 1.8 percent drop in revenues in the European currency. The area accounted for 10 percent of sales. Galli said that the company has been focused on refurbishing and repositioning the group’s stores in Japan, a project concluded last year with “a major” Miu Miu store opening. “We have been tweaking a network of stores that dated back 25 years,” said Galli. In Japan, Prada hasn’t altered its prices because of the weaker yen, but it has repositioned the brand, eliminating nylon bags in favor of leather. While admitting a rebound over the past five months, Galli remained cautious. “We hope Japan will consolidate its rebound and we will [take decisions] about the area in the future.”

Globally, sales of the Prada brand rose 18 percent to 638.8 million euros, or $836.8 million, contributing to the lion’s share of group revenues. Miu Miu gained 5 percent, reaching 112.7 million euros, or $147.6 million. Galli conceded that Miu Miu’s growth was “a little lower than expected,” but urged “to be more patient, as this is a very difficult market for a brand of this size to express its full potential.”

Church’s sales were up 2.8 percent to 16.8 million, or $22 million, while Car Shoe fell 41 percent to 3.7 million euros, or $4.8 million, “because of the overall reduction in the wholesale channel,” said Galli. Asked by one analyst if the company was thinking of off-loading these brands, Galli said the plan is to “keep them as an opportunity to expand in the future.” There are Church’s events planned in China and Japan this year, he said. “It’s not the right moment to invest in them now, it’s more sensible to invest in Miu Miu, which can be huge.”

Capital expenditures jumped to 178 million euros, or $233.2 million, of which 160 million euros, or $209.6 million, were aimed at retail. This compares with investments of 55 million euros, or $72 million, in the first quarter last year. Galli attributed the “exceptional” high investments this year to the purchase of the Bond Street boutique in London and of a venue in Saint Petersburg, Russia — “the only way to enter that marketplace,” said Galli. Referring to the London venue, “one of the group’s most important ones,” Galli said this was “a strategic and defensive move,” citing a local law. “It was essential to keep the store when the lease expires or you can be thrown out. Also, rental prices never went back in London.”

He also underscored that sometimes expenses connected to store renovations “are as high as opening new” locations and that “more stores are expected to open in the second half of the year. We will continue to push the phase of investments.”

As of April 30, Prada’s net financial position stood at 360.5 million euros, or $472.2 million, compared with 122.4 million euros, or $161.5 million, at the end of April last year.