MILAN — Patrizio Bertelli remains confident the foundations that Prada has set “will bring excellent results and performance.”
The Italian luxury group’s chief executive officer ticked off the investments made over the past two years in technological, industrial and digital development, infrastructure, research, communication and training as he commented on 2018 figures in a call with analysts on Friday.
For the first time on the call, Bertelli was flanked by his son Lorenzo, who is now head of marketing and communication. The younger Bertelli joined the Prada group in September 2017 as head of digital communication to support the company’s digital transformation. He is now ramping up the fashion house’s e-commerce to reach global coverage by 2020 and developing digital projects to drive brand engagement, and boost operational efficiency and effectiveness through new technology.
And things are moving along. The technology and digital strategy is in place and delivering, Lorenzo Bertelli said, with strong double-digit growth in sales through the group’s own online platform. He is also focused on expanding the group’s omnichannel business in 2019. “Europe, the U.S. and China are already omnichannel, although not yet at the level we are aiming at but we’ve seen big improvements.” The group presented 20 drops last year through partnerships with e-tailers, reinforced by exclusive capsule collections.
“We have started merchandising activities, not just emphasizing individual markets but with a consistent image reaching out not only to Millennials but also to the Generation Z — likely to become the new luxury consumers,” said Patrizio Bertelli.
Bertelli touted the group’s performance last year, which saw another sharp drop in profits, but a gain in revenues.
The company reported a 17.6 percent decline in 2018 net profits, which fell to 205 million euros, compared with 249 million euros in 2017.
However, in the 12 months ended Dec. 31, revenues were up 3 percent to 3.14 billion euros, compared with 3.05 billion euros in 2017. At constant exchange rates, sales grew 6 percent. The performance was lifted by the retail channel and progress in all geographic areas and across product categories, and was achieved despite an uncertain global market and “difficult” situations in England and France.
The ceo emphasized the decision to end markdowns starting in 2019, after gradually reducing them in 2018. “This has already impacted results and I believe it will utterly strengthen the brand image and guarantee higher margins, yielding results in the medium-term,” he said.
To wit, in 2018 the retail channel was up 4 percent to 2.53 billion euros, or 7 percent at constant exchange, accounting for 82 percent of total revenues, and it was driven by full-price sales. The company rolled out 48 pop-up stores and 50 Linea Rossa special set-ups, fully integrated with digital and social campaigns. The Linea Rossa line was relaunched in September last year, receiving positive feedback, said Bertelli. More than 700 promotional events were launched in the year to strengthen relationships with clients. There were 29 store openings and 20 closures, with 120 renovation and relocation projects.
On the other hand, the wholesale channel was flat, totaling 566 million euros, compared with 565 million euros in 2017.
“It is clear that the digital transformation has radically altered relationships with consumers, making them ever more aware of their purchasing choices. In this context, communication takes on an even more crucial importance to effectively reach our customers,” said the ceo. “With this objective in mind, we will continue to invest in all our digital assets to create an increasingly immersive brand experience with a unique and engaging involvement at all touch points. We are also investing to strengthen the industrial infrastructure to ensure timely responses to the different needs of the individual markets, translating our creative vision of the evolution of looks into products readily available at our stores. In the next few months we will be engaged in accelerating this renewal process, and I am certain that all those initiatives, essential for the group’s future, will create value for our shareholders in the medium-long term.”
Ready-to-wear grew last year by 7 percent to 666 million euros, representing 22 percent of the total, with strong performance in men’s clothing while lifestyle lines outperformed. “We are very much committed to developing our ready-to-wear and we believe that our price-quality ratio is more than reasonable,” without compromising on core values and “brand integrity, at the heart of any decision,” said the ceo.
In 2018, leather goods gained 3 percent to 1.75 billion euros, accounting for 57 percent of total sales. At constant exchange, they rose 6 percent. The performance was driven by both carryovers and new products introduced during the year, as well as the different price points. Bertelli said that the group reported the best sales performance with handbags retailing at between 1,400 and 1,800 euros.
Footwear was down 1 percent to 616 million euros, but up 2 percent at constant exchange, thanks in part to the success of the new sneaker collections. “In the past 18 months, the consistent launch of sneakers gave very positive results and the trend will continue, but these are more lifestyle types of shoes,” observed Bertelli, who said prices are “exactly in line” retailing at 550 euros for Prada and 490 euros for Miu Miu.
Bertelli turned his attention to production issues in Italy and how the group has invested in buying its own footwear and leather goods manufacturing facilities. “In Italy, there is a high level of conflict, with all brands producing in the country, and wanting to own and protect [manufacturers] for a high-quality standard. There is a generational turnaround and many [artisans are at the age of retirement] and their children are not interested in continuing the business. But the better products’ performance will absorb higher structural costs.”
In June last year, Prada unveiled a new state-of-the-art industrial complex in Tuscany’s Valvigna.
“Our industrial investments are completed, we have renovated all industrial facilities in three years, with the addition of logistics last year. We stepped in pretty challenging situations with suppliers,” continued Bertelli, pointing to the “anxiety” of Italians, affected by various different “turmoil, such as the country’s politics or Brexit, and the high costs of raw materials,” for example.
Last year, sales of the Prada brand were up 4 percent to 2.55 billion euros, accounting for 83 percent of the total. At constant exchange, sales grew 7 percent with positive trends in all markets and product categories.
Miu Miu was down 1 percent to 453 million euros, accounting for 15 percent of the total. At constant exchange, sales grew 2 percent, with ready-to-wear up 7 percent and footwear and leather goods stable.
Church’s was down 3 percent to 69 million euros, dented by the wholesale reorganization.
Chief financial officer Alessandra Cozzani said unfavorable currency trends translated into a dilution of operating margins of around 140 basis points, while margins at constant exchange rates remained substantially stable.
Sales in the Far East grew 6 percent to 1.03 billion euros, with increases across all the main markets fueled by both local consumption and intra-regional tourism flows. The region represented 33 percent of total sales. At constant exchange, revenues in the area were up 10 percent. Sales in Greater China rose by 5 percent. There was some slowdown in Hong Kong and Macao in the last quarter due to the devaluation of the renminbi, said Cozzani. However, Bertelli underscored that China, while becoming more selective, was “not a big challenge.”
Sales in the Americas inched down 1 percent to 426 million euros, representing 14 percent of the total. At constant exchange, they rose 4 percent, lifted by local customers and tourists, despite a strengthened dollar. The year 2019 kicked off well in the region, said Cozzani.
Revenues in Europe were up 2 percent to 1.19 billion euros, accounting for 38 percent of the total and despite a decline in tourism flows and supported by domestic consumption.
Japan was up 4 percent to 350 million euros, representing 11 percent of the total, boosted by local consumption. At constant exchange, sales grew 7 percent.
The Middle East was up 1 percent to 94 million euros or 5 percent at constant exchange rates.
Capital expenditure amounted to 284 million euros, channeled into refreshing stores with more than 150 projects, and in strengthening the supply chain and technological infrastructure of the group. The IT investments are part of the group’s broader digital transformation strategy. Asked about investments in communication, Lorenzo Bertelli said that 50 percent of communication is directed into the digital channel.
For the first time, Prada is the title and presenting sponsor of the 36th America’s Cup and the Challenger Selection Series for the America’s Cup, which will start in January 2021 in Auckland will carry the Prada name. “Lifestyle outperformed, we have a strong sports identity,” said Lorenzo Bertelli. “The America’s Cup easily helps create digital assets and reach a younger audience than with Prada.”