A look from Prada Resort 2020

MILAN “Protect the product.”

Prada chief executive officer Patrizio Bertelli repeatedly lashed out against “uncontrolled attacks” against the Italian group’s merchandise by “uncontrolled sales.” For this reason, during a conference call with analysts on Thursday, he trumpeted the “very important decisions made to provide results in the second half of the year and the first half of 2020.”

Two such decisions were the end of markdowns beginning on Jan. 1, 2019, and a rationalization of the group’s wholesale channel.

“We have forced wholesalers not to sell outside their geographies to reduce the amount of product in the market and prevent parallel sales,” said Bertelli, commenting on Prada SpA’s first-half results. “In 2020, we have cut down budgets for wholesalers by 50 percent. We need to protect the product and protect retail. There must be greater consistency with the digital channel, no gaps and inconsistencies. This is of paramount importance, through our stores and official channels.”

In the six months ended June 30, net profits jumped 46.6 percent to 155 million euros, benefiting from the Patent Box tax relief relating to the years 2015 to 2019. In the same period last year, profits totaled 105.7 million euros. If the bottom line in the same period last year is restated under the new accounting guide IFRS 16, whereby all leasing contracts must be recognized in the balance, net profits in the first half climbed 57 percent, compared with 99 million euros.

Sales rose 2 percent to 1.57 billion euros, compared with 1.53 billion euros last year. At constant exchange, revenues were flat.

Bertelli said the wholesale channel was “paramount” from the Nineties until about a decade ago, but then this access to product and the parallel channel started “invading the whole world through all possible channels and polluted the market,” even pointing to Asia being “sick” with the amount of product. Leather goods were the main products to fill the parallel channel and this category is the one expected to gain the most by these strategic decisions, which he said have already been well-received by the market.

“Full-price retail sales increased across the main geographies and product categories, reflecting the soundness of our choice. We believe that improving consistency in pricing will reinforce the relationship with customers and enhance product value,” he said.

Chief financial officer Alessandra Cozzani said starting in 2020, there will no longer be any additional negative impact from seasonal markdowns, with normalized sales. “There was an improper use of product, offered in any kind of channel and e-tailer at any price. Now the restrictions applying to wholesale and e-tailers will enable [us] to bridge the gap in the market,” said the cfo.

Head of marketing and communication Lorenzo Bertelli underscored, however, that this “does not mean we don’t want to keep key wholesalers that can positively affect” business.

In the first six months, the retail channel was in line with the same period in 2018 with sales of 1.23 billion euros, accounting for 80 percent of the total. At constant exchange it was down 3 percent, impacted by the strategic decision to stop seasonal markdowns.

Full-price retail sales were up in the low-single digits in the first half, progressively improving during the semester. A strategic phaseout of markdown sales impacted retail trends in the first half by the midsingle digits, or 64 million euros.

“We think our stores can be more profitable, there is untapped potential to express and we had underestimated our wholesale actions,” said Bertelli. “We think that Prada in the next months and years will rely on a direct channel that will account for 95 percent of sales.” The company, he said, wants to have “total control over distribution” and is planning several events and the opening of pop-ups.

The wholesale channel, not yet impacted by the recent rationalization decision, was up 15 percent to 274 million euros, mainly driven by e-tailers. Full-price retail sales were up midsingle digits, boosted by locals and tourists.

The ready-to-wear category in the period grew 8 percent to 339 million euros, lifted by the men’s and women’s collections.

“This is the telltale evidence this is the strongest brand when creating lifestyle,” said the chairman. At the same time, he noted that the company has decided to reintroduce the Linea Rossa line, which “fully meets the needs of a certain public.”

Leather goods and footwear were stable. Sales of the former inched up 1 percent to 868 million euros, contributing to 56 percent of the total, while footwear totaled 309 million euros, compared with 308 million euros in the same period last year.

By brand, Prada grew 4 percent to 1.28 billion euros, accounting for 83 percent of total sales, with largely positive full-price retail sales throughout the period.

Miu Miu was down 6 percent to 221 million euros, accounting for 14 percent of the total. Despite the decrease, the company said this was the sixth consecutive semester of a positive organic growth trend in rtw. “The leather goods product portfolio is being reviewed for a consistent offer,” said Bertelli, adding in response to an analyst that there were no plans to enter the men’s category with Miu Miu and that the brand is “slightly profitable,” with expectations to grow “in a positive way.”

Church’s was up 4 percent to 33 million euros.

In the six months, earnings before interest, taxes, depreciation and amortization totaled 491 million euros with an incidence of 31.2 percent on revenues. EBITDA was down 2 percent compared with the restated numbers last year, impacted by the IFRS 16 rule.

Operating profit decreased 13 percent to 150 million euros, compared with the restated figure of 173 million euros, impacted by continued investments in the brands.

Sales in Europe grew 6 percent to 598 million euros, representing 39 percent of the total and mainly driven by the wholesale channel.

Sales in the Americas were up 6 percent to 216 million euros, accounting for 14 percent of the total, largely supported by local consumers.

The Far East was down 4 percent to 499 million euros, representing 32 percent of the total, negatively impacted by social unrest in Hong Kong, which has a midsingle-digit contribution to the group, said Cozzani, and foreign exchange fluctuations. Full-price retail sales were stable.

Greater China was down 2 percent to 337 million euros, accounting for 22 percent of sales. Mainland China instead recorded a positive performance: the recent communication 
initiatives tailored to the local market are strengthening local customer engagement, said Bertelli, adding that “China was particularly attacked by the parallel channel,”  especially bags and footwear, while rtw has the added complication of size, for example. “Parallel has a very specific target for mass production, such as branded T-shirts. One must look into the quality of business.”

Sales in Japan grew 5 percent to 181 million euros, accounting for 12 percent of the total, driven by local consumers.

The Middle East was up 1 percent to 51 million euros.

“Every nationality is growing, and the Chinese are the most stable,” said Cozzani, responding to an analyst. “They are buying more at home, due to our activities there and the initiatives of the government to repatriate spending.” The Americans, she said, are “spending a lot in Europe and they are improving in the second part of the semester and in July.”

“We are strongly committed to driving digital technology across the business, leading to more efficient decision-making, as we are aware that digital innovation is key to compete in an evolving market,” said Bertelli. “Executing this program is the necessary step towards sustainable revenue and margin growth, which we will target by strengthening our brands’ cultural heritage — essential to our group’s future.”

He noted that in Italy companies have been “forced to acquire production facilities” to preserve craftsmanship and expertise, but he also segued into building new management and training young people. These actions, he said, “are not a cost but an investment for the next 20 years.”

Cozzani said the company has hired 40 employees in the commercial area since the beginning of the year. Operating expenses grew by 19 million euros, mainly driven by additional communication and advertising activities and higher personnel costs.

Capital expenditure included the acquisition of a strategic retail asset in Madrid for 60 million euros and totaled 177 million euros, compared with 126 million euros in the first half last year. There were 11 store openings and 10 closures in the period and around 50 renovation and relocation projects.

As of June 30, the net financial position was negative at 507 million euros, including a dividend of 146 million euros. This compared with a negative financial position of 314 million euros at the end of December. Cozzani said she expected the position will improve in the second half.

Lorenzo Bertelli said the company will unveil an enhanced version of the group’s web site at the end of October.

Chairman Carlo Mazzi said the group’s “Shaping a Future Sustainable Society” conference this fall will be held in New York, focusing on freedom, equality and justice within the working environment.

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