MILAN — Ahead of the release of year-end financial results of brands including Prada and Moncler, HSBC issued a report called “Too Bling to Fail,” stating that “large groups outperform independent ones with very few exceptions.” The banking institution sees scale as an ongoing competitive advantage and merger and acquisitions as collateral. In tune with this view, HSBC downgraded Prada and Moncler’s rating to “hold” and maintained “reduce” on Salvatore Ferragamo and Tod’s, preferring giants such as LVMH Moët Hennessy Louis Vuitton, Kering and Compagnie Financière Richemont.
Erwan Rambourg and Antoine Belge at HSBC believe that the publication of Prada’s results, to be released on March 12, is “unlikely to act as a catalyst” and that Prada is impacted by the “big outpaces small” 2019 issue. HSBC pointed to Prada’s “late” digital transformation, compared to Louis Vuitton and Gucci, which “invested heavily and outperformed peers by a wide margin” in 2017 and 2018.
The analysts also emphasized the “flight-to-quality” phenomenon, which in their opinion is also expected to be penalizing for Prada as “the magnitude of the scale-down in consumer purchases can be less severe” for stronger brands such as Louis Vuitton and Gucci. As reported, sales at Gucci topped 8 billion euros in 2018, and in the fourth-quarter organic revenues at Gucci rose 28.1 percent, topping consensus forecasts, but signaling a normalization after seven consecutive quarters of growth exceeding 35 percent. Gucci sped to record profitability in 2018, with a recurring operating income margin of 39.5 percent.
Given the relevance of technology, which they believe is “a game-changer in the industry,” the brands that are investing the most to influence consumers are the winning ones. “While in some other consumer sub-segments, technology lowered barriers to entry, the opposite is happening in luxury. Prada has taken several strategic steps to be more active in terms of digital marketing, increasing the share of product newness, cutting markdowns, [but] we believe the group is temporarily losing ground to bigger sector peers, which keep investing heavily in these strategic areas.”
Prada in August reported improved profits and sales, which led chairman Carlo Mazzi to emphasize the soundness of the company’s strategy. Prada saw a 10.7 percent rise in net profits in the first half to 105.7 million euros, compared with 95.4 million euros in the same period in the previous year. In the six months ended June 30, sales rose 3 percent to 1.53 billion euros. At constant exchange rates, revenues rose 9 percent. At the time, Mazzi ticked off the key planks of the strategy as: The enhancement of the customer experience; a sound digital evolution that draws a younger generation; a constantly renovated and refreshed retail network and successful partnerships with e-tailers, which helped to lift business.
HSBC believes Prada’s performance in the second half last year is “likely to have slowed down due to the deterioration of the feel-good factor given the global equity market correction, on top of several uncertainties in Europe,” such as the yellow vests protests in France and Brexit, as well as the global trade tensions. HSBC forecast a 6.5 percent organic sales growth and operating profit to be up 3 percent to 370 million euros.
Anne-Laure Bismuth, analyst, global consumer and retail at HSBC, also downgraded Moncler to “hold” from “buy” in the same research, mainly in light of a particularly challenging basis of comparison compared with the first half, when like-for-like sales were up 27 percent including almost no impact from Genius launched in mid-summer 2018, and due to an unusual warmer weather.
HSBC flagged Moncler as the only exception to the report’s “big outpaces small” theme as the company, with sales of almost 1.4 billion euros last year, “is growing at a faster rate than the luxury goods sector despite its smaller size.” This is attributable to “its niche brand positioning with far less competition than in apparel and handbags” and the “strength of its management team, which makes us believe that it could be the next aggregator in the sector, thus becoming a bigger player.”
Moncler is slated to report its year-end results on Feb. 28 and HSBC believes they will be “strong” and that Moncler has an “intact mid-term potential,” supported by a retail expansion, which could reach around 300 units in the mid-term, compared with 2014 at the end of September last year.
HSBC believes Moncler is leveraging “the success of the rollout” of the Genius capsule collections. Moncler Genius was introduced a year ago and the new chapter of this capsule project was unveiled on Feb. 20 during Milan Fashion Week, taking over a whole Milan street at the Magazzini Raccordati, a storied site linked to the Central Station, marked by a series of warehouses and tunnels that connect different train tracks and platforms, which Moncler is helping to restore. New additions to the roster of designers, spanning from Pierpaolo Piccioli to Simone Rocha, this season included British designer Richard Quinn, and Matthew Williams of 1017 Alyx 9SM.
HSBC believes Moncler Genius has the potential to recruit new customers and it expects sales to be up 17 percent at constant exchange rates, boosted by a 16 percent retail gain, compared with a 2 percent growth in wholesale due to a challenging basis of comparison and earnings before interest, taxes, depreciation and amortization to grow 16 percent to 364 million euros. “Moncler remains a success story with a combination of best-in-class production and execution driven by a solid bench of managers,” stated HSBC. The company is led by chairman and chief executive officer Remo Ruffini, who spearheaded a turnaround of the brand.