Prada RTW Fall 2019

MILAN Prada Group shares closed down 10.6 percent to 22.35 Hong Kong dollars, or 2.50 euros, on Monday on the Hong Kong Stock Exchange after the Italian fashion group on Friday reported a 17.6 percent fall in net profits to 205 million euros, compared with 249 million euros in 2017. The stock has lost about 36 percent over the past year.

The company has gone through a restructuring and its chief executive officer Patrizio Bertelli expressed his confidence in future growth as he commented 2018 figures, which showed a 3 percent increase in revenues to 3.14 billion euros last year, but a slowdown in the last quarter in Hong Kong and Macau and the additional investments necessary to turn the company around worried analysts.

On Friday, Rogerio Fujimori at RBC Europe Ltd. underscored that the company is trading “short-term pain for long-term gain.” Prada plans to continue to invest in the year and reduced its markdowns in 2018 and will eliminate them in 2019 “to strengthen the brand’s image and guarantee higher margins,” said Bertelli, but this decision hit sales harder during the second half and should continue to do so in 2019, Fujimori expects.

Fujimori warned that “the combination of lower than expected 2018 earnings, zero markdown strategy further impacting sales growth in 2019, and potential gross margin tailwind from higher full-price sales and midsingle-digit opex inflation should translate” into a 20 percent reduction on the consensus for 2019 estimated earnings before interest and taxes. “The reality is that 2019 estimated consensus expectations were already too punchy to us before today’s results,” Fujimori said.

“That said, long-term investors should keep in mind the respectable 8 percent increase in full-price retail like-for-like in the second half, and high reinvestment levels with Prada’s zero markdown policy ultimately enhancing long-term brand equity and profitability.” In light of its sales totaling more than 3 billion euros, “respectable brand equity in leather, intact fashion authority,” Prada’s EBIT margin has, “in theory, the potential to recover to at least 20 percent level in the long term,” Fujimori added. “Improving product innovation momentum and stronger digital marketing should further enhance Prada brand appeal to younger consumers in the long term. The margin recovery trajectory is likely to take longer than expected by the market due to the need to reinvest to digitalize the business and reduce markdowns against a backdrop of slowing global luxury demand growth in Greater China/USA/Europe.”

Melania Grippo, luxury goods analyst at Exane BNP Paribas, said Prada’s 2018 results were “weaker than expected by around 8 percent on EBITDA and around 20 percent at the net income level.”

On Monday, China Merchants Bank cut its price target for the stock to 24.84 Hong Kong dollars a share from 28.67 Hong Kong dollars, pointing to an unexpected rise in production costs and higher operating expenses.

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