Prada RTW Fall 2015

MILANPrada SpA’s profits continue to tumble, but it has a plan to get back on track.

As the luxury goods firm reported a 26.3 percent drop in net earnings for the nine months ended Oct. 31 — including a continued steep decline in sales of its core leather goods — chief executive officer Patrizio Bertelli said the keys to returning to growth will include strengthening relations with its customer base, continuing to push innovative design and narrow price differentials across the globe. “We focus on new product designs and stir the market with new options,” observed Bertelli during a conference call with analysts on Tuesday. Prada earlier in the day reported that sluggish sales in Asia-Pacific, a weakened U.S. market penalized by the strong dollar, and a lackluster market for leather goods affected the group’s profitability in the first nine months. Profits fell to 235.1 million euros, or $261 million, compared with 319.3 million euros, or $427.8 million, in the same period a year ago.

Lifted by the performance of its directly operated stores, company revenues rose 1.2 percent to 2.58 billion euros, or $2.86 billion, compared with 2.55 billion euros, or $3.41 billion, last year.

Dollar figures were converted at average exchange rates for the period in question.

During a question-and-answer session, Bertelli cited data showing a 30 percent decrease in hotel and flight bookings in Paris, London and Milan. “It’s a political question. We are told we are at war and the situation is not favoring tourism. The Far East feels detached and tourists travel to Korea and Japan,” he said.

The executive said Prada planned to reduce the price differential between Europe and China to 10 to 15 percent, down from 35 percent. “We must flatten the spread as much as possible and uniform prices around the world,” said Bertelli.

The ceo said products at different price points will be introduced in January. “The Prada brand needs to provide bags ranging from 1,600 euros to 3,500 euros [$1,757 to $3,295 at current exchange]. Twenty-five percent of our sales are in the range of 2,500 euros [$2,745]. We have to increase that without losing sight of the intermediate [offer],” said Bertelli.

Responding to an analyst, he stressed that he was not talking about a price reduction but about narrowing the gap around the world by increasing prices in Europe. “The spillover between one market and the next must not be sustained but curbed. I don’t think customers are looking for cheaper products but for the right style. Fashion has to be supported and we must spice up products,” he said.

Bertelli said the company is focusing on technology and social media, from Instagram to Twitter, to engage customers and that, from Jan. 15, Wi-Fi service will be available in its network of Prada and Miu Miu stores to make products more accessible to customers. Chief financial officer Donatello Galli said during the call that Prada’s planned interactivity with customers will also allow the company to acquire “deeper insight” on their behavior. He noted it is increasingly challenging to serve the customer but sees this as “an opportunity.” Echoing Bertelli, he also noted that the “price architecture is one important driver, a strategic issue the company must tackle toward harmonization.”

Despite ongoing strategies to control costs, Galli said there are “no easy shortcuts” and that Prada continues to invest in “product, communication and brand equity. The market will put a premium on this and companies that have a stylistic premium like we do. The market is beating on the head of luxury but we think long-term, and Prada is well-positioned to regain growth.”

“In the medium-term, we remain optimistic about the outlook for the segment and confident that the undoubted stylistic leadership of our brands and our positioning — with global coverage already secured by our extensive retail network — will be key factors in facing up successfully to future challenges,” said Bertelli.

In the period, wholesale revenues decreased 15.9 percent to 295.5 million euros, or $328 million, while retail sales were up 3.8 percent, totaling 2.25 billion euros, or $2.5 billion.

Lifted by the launch of the first Miu Miu fragrance, royalties rose 16.2 percent to 33.5 million euros, or $37.2 million.

Sales in Europe gained 8.6 percent to 816 million euros, or $905.7 million, boosted by the weakening euro, and drawing tourists from Asia and the U.S. “The Italian market continued to stand out among the various European countries and recorded growth rates well above the average for the area,” said the company.

Japan was up 10.4 percent due to the growing number of Chinese tourists.

A reduction in local and tourist sales, as well as Hong Kong and Macao’s ongoing slowdown, dented the Asia-Pacific market, which recorded a 5 percent decrease to 784.4 million euros, or $870.6 million. At constant exchange, sales dropped 18 percent. Galli reiterated that the company was “positive, long-term on China. Maybe in different forms, but the Chinese will continue to buy,” he claimed, while admitting it was “very difficult to extrapolate the future in mainland China,” where the company has seen a slight improvement. “Korea is much more stable,” he said.

In the U.S., sales rose 8.5 percent, but at constant exchange decreased 7.6 percent. The strong dollar impacted tourism mainly from China and South America, but, at the same time, lifted American consumer spending in Europe.

By brand, sales of Prada were up 2.1 percent to 1.83 billion euros, or $2.03 billion. At constant exchange, sales dropped 6 percent. A positive organic trend in Europe and Japan did not compensate weakness in Asia Pacific and the U.S. Miu Miu grew 11.8 percent to 368.3 million euros, or $408.8 million, but at constant exchange sales were up 2 percent. Growth was sustained by a good performance in Europe, the Middle East and mainland China. Church’s rose 17.6 percent to 39.3 million euros, or $43.6 million.

Margins for the period were affected by the lack of organic growth accompanied by an increase in selling costs due to retail network expansion.

In the nine months, earnings before interest, taxes, depreciation and amortization decreased 12.7 percent to 595.4 million euros, or $661 million, representing 23.1 percent of sales. Operating profit dropped 24.7 percent to 373.9 million euros, or $415 million.

The leather goods category showed a 1 percent decrease to 1.42 billion euros, or $1.57 billion, affected by positive organic growth in Europe and Japan but hurt by a negative trend in Asia-Pacific and the U.S. At constant exchange, sales of the division decreased 10 percent. Galli said the company “worked at all levels” on this category, “rebalancing offers and structure. We did our homework, but market conditions are difficult in terms of interpretation.”

Footwear rose 24 percent to 399.7 million euros, or $443.6 million, after six consecutive quarters of double-digit organic growth.

Ready-to-wear gained 6 percent to 379.7 million euros, or $421.4 million.

Asked by one analyst if Prada had considered delisting the company, which is publicly traded in Hong Kong, Galli said the option had never been discussed. “We are very confident in what we can do and we can recover growth past this [moment].”

In the period, the company opened 29 stores and closed 11 for a total of 612 directly operated units. Galli said the company will limit openings to around 10 stores next year, citing an “optimization” of the network, “not a drastic change,” and also reviewing the store concept.

The executive also urged analysts to review the new Corporate Social Responsibility Web site launched Monday, detailing the group’s efforts and investments over the years, citing the most recent acquisition of a tannery in France.

Galli said the effect of foreign exchange was “lowered” in the third quarter, but conceded it was difficult to provide forecasts. “The negative effect of hedging should be reverted in 2016,” he added.

Asked about business in October, the executive reported “no meaningful differences. You cannot expect Paris or Europe to have positive numbers. The drop of tourists is material and I don’t think it will revert for Christmas.”

Citi’s Thomas Chauvet said in his report that Prada shares have underperformed the luxury sector year-to-date. “The publication of weak third-quarter results and cautious outlook comments are unlikely to provide much relief for the shares near term, in our view.” Chauvet, however, said “with the announcement of key initiatives” such as cost-control and price-mix rebalancing, this represents an attractive buying opportunity for any investor looking for a recovery in sales/earnings.”

Rogerio Fujimori at RBC Europe said the Prada brand’s leather bags performance and men’s ready-to-wear (especially in Asia) “were the main drags to the group’s top line” business suggesting “ that the Prada brand continues to be more impacted than most luxury peers by a deteriorating external environment for the sector since August.”


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