Prada Resort 2019

MILAN — “We continue to dream every morning. The new trend is not the result of work done in a few weeks or months but in a couple of years and we are confident this is the right path.”

So said Carlo Mazzi, chairman of Prada SpA, as the group on Wednesday reported improved profits and sales, enabling him 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 last year.

In the six months ended June 30, sales rose 3 percent to 1.53 billion euros, compared with 1.48 billion euros in the first half last year. At constant exchange rates, revenues rose 9 percent.

“We see the concrete results of the transformation process, constantly working to interpret the new generation without losing the spirit” of the brands, said Mazzi during a conference call with analysts on Wednesday.

The performance “shows our strategic choices were the right ones,” he said, adding the group plans “to drive excitement also in the second half.” 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;
  • Successful partnerships with e-tailers, which helped to lift business.

He also listed “a balanced mix of newness and heritage in leather goods, the outstanding performance of ready-to-wear confirming our design leadership, collaborations and drops driving consumer excitement.”

While chief executive officer Patrizio Bertelli was not on the call, in a statement he said that the results were “very satisfactory,” noting that the growth was achieved across brands, markets and products, and highlighting “margin progression,” despite continued investments.

“We are always working to reshape the Prada Group to adapt to the rapid changes in society and to interpret the spirit of new generations without losing our brand integrity,” he said, expressing his confidence “that this new phase of growth will be translated into value creation for all group stakeholders.”

In the first half, both the Prada and Miu Miu brands showed improvements. Prada sales were up 4.1 percent to 1.23 billion euros, driven by positive trends across all geographies and product categories, accelerating the trend already seen in the last months of 2017. At constant exchange rates, they rose 10 percent

Miu Miu revenues grew 2 percent to 235 million euros. At constant exchange, they rose 8 percent. Miu Miu, said Mazzi, “is a new start, a new image,” pointing to the conversion of almost all the brand’s stores into a new blue concept. “We are confident we can continue to develop Miu Miu and get very good results. At this moment, we are at break-even point for Miu Miu margins. The plan is to reach at least sales of 800 million euros in two or three years,” he said.

Church’s revenues were down 6.6 percent to 32 million euros, due to a wholesale reorganization temporarily offsetting positive retail trends.

The leather goods category totaled sales of 859 million euros, up 2.4 percent, or 8 percent at current exchange rates, driven by a balanced mix of newness and heritage, said Mazzi.
 The Prada Black Nylon performed particularly well, Mazzi added.

“We completed our category of prices recently, and we sell better all kinds of bags. We had luck with medium-priced bags and we saw good results not only in this, but with others too, at an average higher price than last year,” he explained.

Sneakers, including the new Cloudbust, helped drive footwear, a category that had sales of 308 million euros, down 1.6 percent at current exchange but up 4 percent at constant exchange rates.

Sales of ready-to-wear rose 13 percent to 315 million euros. At constant exchange, the division climbed 20 percent. Mazzi said the strong acceleration touched both men’s and women’s wear and touted an “excellent response” to the Prada and Miu Miu cruise fashion shows.

Earnings before interest, taxes, depreciation and amortization rose 8 percent to 271 million euros, with margins of 17.6 percent. Operating profit amounted climbed 16 percent to 159 million euros.

The retail channel grew 3 percent to 1.23 billion euros. At constant exchange, it climbed 10 percent. Chief financial officer Alessandra Cozzani emphasized the importance of a rollout of 36 pop-up stores, 25 for Prada and 11 for Miu Miu, which “helped increase traffic in stores surrounding the pop-ups. They are one of the reasons for good retail results in the period,” she said.

The company will also relaunch the Linea Rossa line with a special set-up in directly operated stores in the second half. Chiara Tosato, general manager and digital e-commerce director, said the company believes “it will have a positive impact on revenues. Ready-to-wear will further develop our lifestyle offer using advanced fabrics and materials and will have a positive contribution in the second half.”

The wholesale channel was up 5 percent to 274 million euros, or 8 percent at constant exchange. The division was mainly driven by e-tailers. For example, the “bowling capsule” with Mr Porter, the “Drop shopping experience” at Barneys New York and Church’s Vetements collaboration at Matchesfashion and Mr Porter. Farfetch launched Prada and Miu Miu in the first half in the U.S., Europe and Japan and Tosato said the company is “directly selling our products and aims to further widen coverage worldwide and open in new markets.”

Cozzani said there was “continuing improvement driven by same-store-sales growth and full-price sales,” as well as strong double-digit online sales growth, and an ongoing strategic reduction of markdown sales, which now represent only around 10 percent of retail sales. The company continued to optimize its retail network with the opening of 17 and closure of 13 stores in the period.

The Asia-Pacific region rose 7 percent to 520 million euros, or 14 percent at constant exchange rates, driven by significant sales growth in Greater China, which was up 17 percent to 344 million euros, with a further acceleration in recent months.

In the U.S., local consumption recovered, despite unfavorable exchange rates. Thanks to a particular strength in Prada’s own stores, sales totaled 204 million euros, down 4 percent but up 8 percent at constant exchange.

Europe also registered a positive performance, up 5 percent to 563 million euros, despite a decrease of tourist flows due to the strengthening of the euro.

Japan totaled sales of 171 million euros, in line at current exchange, and saw a significant recovery, benefiting from domestic spending and tourist flows. At constant exchange, sales grew 9 percent.

The Middle East was down 4 percent, but grew 7 percent at constant exchange to 51 million euros.

Operating expenses rose 0.6 percent to 947 million euros, driven mainly by increased advertising and digital media spending. Capital expenditures totaled 126 million euros, compared with 106 million euros. In the first half, Prada unveiled a state-of-the-art industrial complex in Valvigna, Tuscany.

During the period, the group generated operating cash flow of 180 million euros, which fully financed investments of 126 million euros.

As of June 30, the net financial position stood at a negative 240 million euros, following a dividend payment of 186 million euros during the period.

Cozzani said she was “comfortable with the consensus on the level of sales margins,” although that depends on foreign exchange rates in the second half. “We are quite confident to have a similar trend in sales growth,” she said, adding that July had been a positive month.

Asked about the possibility of Prada parting ways with fragrance and beauty licensee Puig, Mazzi said the license will expire in 18 months and that, before then, Prada “will discuss with Puig and other big companies in the sector for a renewal or a new agreement depending on the opportunities we can catch. It’s an important relation but not crucial,” given the size of that business and that the company is “considering the opportunity to increase it.” He also responded to questions about possible acquisitions or sales of the brands in the portfolio, saying there were no projects in that sense, and that Car Shoe was “dormant.”

In a note on Wednesday, Exane BNP Paribas’ Luca Solca said that Prada shares were upgraded to Neutral from Underperform and that the performance was improving, although profitability was “not there yet.” Solca said “the brand is seemingly starting to “get it,” having updated its product offering (e.g., the return of nylon) and distribution (physical optimization, in-store experience, new concept and digital push). New handbag styles are selling well, and have grown materially in the mix, rising above 40 percent of leather goods sales. This demonstrates that the creative talent is tip-top.”

On Tuesday, J.P. Morgan Cazenove also upgraded Prada to Overweight from Neutral, saying in a note that the company “has undergone a major rejuvenation.” Analyst Melanie Flouquet said she “welcome[s] the wide breadth of offers in styles and prices that the recent collections showcase across products. Prada has been head down, hard-working, adding little by little to the building blocks: product innovation, price points, improving its systems, catching up in e-commerce, updating its promotional activities. Prada management has been cognizant of the changes in the sector dynamics while remaining true to its DNA, more understated than some of its flamboyant peers. We think this is finally paying off: Prada’s time has come, in our view.”

Flouquet differentiated Prada’s “more subdued” turnaround style from that of Gucci. “We have repeatedly been asked by investors which brand could be the next Gucci in the sector. To be clear: we don’t think there is a next Gucci. Amongst the hopeful candidates as the next turnarounds we either see companies with key management and designer changes bringing with them hopes of major stylistic and elevation revolution (Burberry, Ferragamo) or companies with an easy base, working hard on the building blocks with no management changes (Prada, Tod’s). None combine an easy base and management changes the way Gucci did.”

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