MILAN — Prada chief executive officer Patrizio Bertelli has something in common with L Brands’ ceo Leslie H. Wexner. Neither loves U.S. department stores.
During a Friday conference call discussing Prada’s financial results, Bertelli lamented the “sale bargains and markdowns” that are pervasive in the U.S., while also expressing confidence about his firm’s prospects for 2014.
While conceding the company saw a slowdown in sales in China and less Chinese traveling to Europe in the third quarter, Bertelli said “the Chinese keep shopping, they travel in more countries and more in New York and the U.S.”
Bertelli said he did “not see major changes in local shopping in Europe, with the exception of Italy and Spain, as luxury consumers are attracted by news and fashion-forward products.”
Boosted by sales at its directly operated stores and led by solid growth in Asia Pacific, in China in particular, and in the American market, Prada reported a 7.9 percent rise in net profits to 440.9 million euros, or $582 million, in the nine months ended Oct. 31, compared with 408.6 million euros, or $523 million, in the same period last year.
Profit was affected by a high tax rate, around 30 percent, said chief financial officer Donatello Galli during the call. “We are in discussions with authorities but not in litigation. There is a different interpretation of the law [related to international operations]. It will take some time.” Separately, Prada said its holding company will repatriate non-Italian activities and activities of partners outside Italy, in particular those located in The Netherlands and Luxembourg.
In the nine months, operating profit gained 10.7 percent to 677.8 million euros, or $894.7 million, representing 26.3 percent of sales.
Revenues climbed 10.1 percent to 2.57 billion euros, or $3.4 billion, compared with 2.34 billion euros, or $3 billion, last year. At constant exchange, sales would have increased 14.3 percent.
All figures have been converted at average exchange for the period to which they refer.
Bertelli said he did “not believe margins are under pressure,” expressing confidence they will be “on the same level in 2014” while maintaining the company’s store openings plan, “confident that marketing, policies, new products for spring and summer are what we need to keep [these margins].” Eighty store openings are planned for next year, of which 55 or 60 will be under the Prada banner and 25 for Miu Miu.
Bertelli also said he was “very confident” in Miu Miu picking up in 2014. The core Prada label grew 13 percent in the first nine months, while Miu Miu sales gained 2 percent. “We have already invested more in communication over the past few months and the results will be seen in the early months of next year,” he remarked.
Asked by an analyst whether the company had increased its prices, Bertelli responded in the affirmative, but defined this as a “limited” hike “in line with the growth of price of raw materials.” Bertelli noted that there is no intention to have customers pay for this and warned against setting in motion “a wrong mechanism. If there is too much rigor, you suffocate the market, it stifles the economy and it’s antiproductive. We are keeping the company efficient, streamlined and fast and the market will recognize this mastery.”
Sales from directly operated stores, totaling 516 at the end of October, amounted to 2.18 billion euros, or $2.87 billion, up 13.8 percent compared with the same period last year. The wholesale channel showed a 6.5 percent decrease as a consequence of its selective strategy in relation to independent retailers.
Not one to mince words, Bertelli said he was going to be “brutally frank,” and lamented that “too many department stores in the U.S. have a vision of business that is too financial, and are not focused on the product. This demonstrates what I and my team have said before, that the management is too confused, and we see permanent end-of-sale bargains and markdowns; they don’t strengthen the image and the product.”
Bertelli explained that Prada could quickly boost sales “by 100 or 200 million euros” if it agreed to this policy, but that, on the contrary, the company wants to work “with serious wholesalers that collaborate and respect the brand, that don’t play games, so we would rather stay away from this and protect the brand and the product and give up market share. Why can’t wholesale do the same that retail does? Why is there not the same performance?” Most of the rationalization has been done, noted Bertelli, adding that Prada has been working on taking upon itself to directly control corners in department stores in the U.S.
Bertelli said margins in 2013 “reflect aspects of commercial strategies” and “keeping [them] stable means having commercial penetration. It’s a good starting point.” Also, he urged to “keep in mind” that a weak dollar weighs on margins. “We will see as we go,” he said.
Galli said “consensus growth is challenging,” while noting that the next few weeks will be “important.”
Galli was prudent, mentioning “broad indications about recent swings of exchange rates” and difficulties in predicting consumer patterns.
He was positive about the Chinese consumer’s attitude but said it was “difficult” to forecast business a month ahead, or performance for the Chinese New Year.
Bertelli said he was “satisfied” with the first nine-month results, “which encourage us to continue along a path of long-term growth, based on a balanced presence in all markets and on the undisputed stylistic leadership of our brands.”
In the period, earnings before interest, taxes, depreciation and amortization totaled 821 million euros, or $1.08 billion, up 12.8 percent. The Asia-Pacific region grew 14.4 percent, showing a slight slowdown in the third quarter. In the nine months, the region, excluding Japan, accounted for 37 percent of revenues. The American market recorded a 13.5 percent increase, mainly due to an acceleration of Prada’s retail channel, and represented 13 percent of sales. Europe logged 5.2 percent growth although sales through the retail network recorded a double-digit gain boosted by the flow of tourists, while the wholesale channel recorded a drop in revenues. Japan continued to grow and was up 18.6 percent at constant exchange. Given the weak yen, at current exchange, revenues fell 2.9 percent.
The Middle East is starting to show its contribution with its 16 directly operated stores generating sales of 65 million euros, or $85.8 million.
Capital expenditures for the period totaled 416 million euros, or $549.1 million, including the purchase of retail properties in London and St. Petersburg, Russia, and was mainly aimed at the development of the group’s retail network.
The net financial position was positive at 303.5 million euros, or $412.2 million, after capital expenditures and the distribution of dividends of 230 million euros, or $303.6 million.
Prada also disclosed that Marco Salomoni resigned as a non-executive director and that group investor relations director Alessandra Cozzani had been appointed executive director.
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