MILAN — “Welcome back, China.”
In a note released on Monday, Macquarie Research emphasized China’s rebound, following Prada SpA’s posting of its preliminary revenues in 2016. Comparing the Italian fashion company’s figures and those of LVMH Moët Hennessy Louis Vuitton, Burberry, Salvatore Ferragamo, Kering and Compagnie Financière Richemont, Macquarie said the improvement at all the groups served “as strong supporting evidence of our argument that the luxury sector in China is recovering and we believe Prada is going to benefit significantly. Apart from an improving top-line, the company will enjoy better margins as China’s EBIT [earnings before interest and taxes] margin is highest among its regions.”
Macquarie cited LVMH, for example, which saw “a complete turnaround” in Asia and in China in June and July; Burberry, which reported “acceleration in mainland China, delivering high-single-digit percentage growth with better footfall trends and improved conversion,” and Richemont, which posted “strong performances” in Mainland China and Korea.
Prada clearly agrees. While the Asia-Pacific region was down 12 percent at constant exchange for Prada in the year, the area “was very dynamic” in the second half and China “resumed rapid growth in the third quarter,” said the Italian company, which is publicly listed on the Hong Kong Stock Exchange. Hong Kong and Macau “saw reduced level of sales contractions versus past years” and Greater China reported higher sales in the last quarter of the year.
“We believe that Prada is no exception to the global luxury recovery trend, with China being the engine,” said Macquarie. “Success in new product launches, improvement in store efficiency and cost savings will bear fruit for earnings growth from fiscal year 2018, in our view.”
If the prediction proves correct, it will mark a much-needed turnaround for Prada. In the 12 months ended Jan. 31, the company registered a 10 percent decrease in sales to 3.18 billion euros, or $3.37 billion, compared with 3.54 billion euros, or $3.91 billion in the same period last year.
Dollar figures have been converted from the euro at average exchange rates for the periods to which they refer.
The company’s revenues were dented by a reduction in tourist flows to major markets ranging from Europe and the Asia-Pacific to the U.S. and Japan. However, the Italian fashion group said it saw a “clear improvement in the second half of the year” and “positive results in January.”
“This past year we implemented a profound phase of business process rationalization — still under way — and identified important strategies to secure the group’s future growth,” said chief executive officer Patrizio Bertelli. “This included revising our digital strategy with the creation of a highly skilled team with professional experience from the digital technology and new media industries.
“In the meantime, we are strengthening the retail management structure with the aim of integrating online channels with traditional channels in a truly innovative dimension. I am confident that this new global vision will enable our brands to fully express their strong potential, and generate sustainable growth: High-quality products, high level of creativity in both communications and customer relationships.”
The company has been focusing on technology and social media, from Instagram to Twitter, to engage customers and, starting last year, Wi-Fi service was made available in its network of Prada and Miu Miu stores to make products more accessible to customers. The goal was for Prada’s planned interactivity with customers to enable the company to acquire deeper insight into their behavior.
In the 12 months, sales in Europe decreased 5 percent at constant exchange, hurt for most of the year by the reduction of tourist flows, especially in Italy and France. The latter, however, showed signs of recovery in the fourth quarter.
Prada highlighted a “particularly positive” performance in Russia, with a double-digit increase, and the U.K., which reversed the decline of the first six months to end the year with strong growth.
Sales in the American market dropped 12 percent at constant exchange rates as it continued to be affected by declining tourist flows, as well as generally soft spending patterns. On the flip side, Mexico and Brazil showed growth despite ongoing softness in those economies.
Japan decreased 13 percent at constant exchange after five consecutive years of growth. The company attributed the drop to the reduced flow of tourists from China due in part to the yen appreciation.
The Middle East posted a 10 percent decrease in revenues.
Both the Prada and Miu Miu labels showed improving trends. The company cited an improvement in sales of ready-to-wear in the second half of the year and “excellent market response” to the latest footwear and leather goods collections. The group has been focusing on the shopping experience, elevating it and making it more “immersive.”
At current exchange, the retail channel decreased 14 percent to 2.63 billion euros, or $2.78 billion. The company has 620 directly operated stores. The performance improved in the second half of the year and in particular in December and in January.
Prada has been slowing the opening of new stores, and, as reported, last August said that it continued to optimize its retail network, targeting the refurbishment of better-performing locations. Last year, Prada unveiled its first flagship in Denmark, located in the Illum department store in Copenhagen; opened its first store in St. Barth’s; opened two stores in Macau, one in Korea, one in Amsterdam, and expanded and renovated its Hong Kong stores on Canton Road, to name a few.
The wholesale channel was up 13 percent to 504 million euros, or $534.2 million, lifted by “initial encouraging results” from the collaboration with e-tailers such as Net-a-porter, in line with a new business plan.
Last July, Net-a-porter launched its edit of Prada’s pre-fall and fall runway pieces as well as bags, shoes and small leather goods. The Net-a-porter introduction took place the same day Mytheresa.com, part of Neiman Marcus Group, unveiled Prada’s fall rtw collection on its online store. The launches have been long-awaited as Prada was one of the last luxury brands to sell online.
Licenses rose 3 percent, to royalties of 45 million euros, or $47.7 million, lifted by both the eyewear and fragrance categories.
Macquarie also emphasized that Prada has applied for benefits under the Patent Box regime, a tax reduction approved in Italy for intellectual property holders, which would enable the company to enjoy tax benefits. “We also increase our earnings forecasts by 13 percent for fiscal-year 2018 by factoring in the tax benefits, better sales and margin assumptions. Our fiscal-year 2018 earnings forecast is 15 percent higher than consensus.”
In a note issued ahead of Prada’s statement on its preliminary figures, Bernstein said it believes “that the new leather products of Prada, especially in the lower price points, have contributed to improved sales volumes. Shoes and especially rtw should continue to be the best-performing product categories in-line with the appreciation that the press has shown for the latest collections designed by Miuccia Prada. Miu Miu should benefit from the new store format which has been deployed in more than 20 locations in 2016.”
It also stated its belief that “the renewed creative effort of Prada will reverse the decline in underlying growth in the next year. The main operational issue of Prada is currently to reengineer the store network with selected closures-downsizing of stores to maximize sales densities and therefore we anticipate a slow margin recovery.”