Despite a decrease in profitability and revenues, the Italian fashion group’s chief executive officer was upbeat about prospects for the year, citing an improving business trend in the second part of 2017 that is progressing into 2018, “demonstrating the first significant results from our ongoing strategic initiatives across the group.”
During a conference call with analysts on Friday to comment on the 2017 financial statement, Bertelli emphasized the investments in the group’s network of stores, with 140 renovation and relocation projects and the opening of 75 pop-up stores; the efforts to boost global brand visibility, and an enriched product offer, all enhanced by a fast-growing digital presence. “We have successfully improved our leather goods offer with increased newness at all price points, supporting full-price sales. The Prada brand has returned to growth across our key geographies.”
Addressing “an increasingly complex market,” Bertelli said the company continued to leverage the group’s “cultural heritage and iconic values,” citing for example the launch of the Black Nylon storied material. “We have seen a promising start to 2018. I am confident this is the beginning of a new phase of development.”
Meanwhile, in the 2017 fiscal year ended Dec. 31, Prada SpA reported net profits of 249 million euros, down 4.3 percent compared with 260.2 million euros in the previous year. Revenues decreased 3.6 percent to 3.05 billion euros, compared with 3.17 billion euros in the previous year. At constant exchange rates, sales dropped 2 percent. For transparency, the financial data refers to 12-month pro-forma data from January to December both for 2017 and 2016 because year-end has been brought forward to Dec. 31 from Jan. 31.
Earnings before interest, taxes, depreciation and amortization totaled 588 million euros, down 7.3 percent from 634.5 million euros.
Operating profit decreased 11.2 percent to 360 million euros from 405.6 million euros.
Moving forward, Bertelli said the company had seen a 7.5 percent increase in sales at constant exchange rates in the first two months of 2018. “Becoming more attractive in our points of sale and through digital activities is yielding significant results.”
Among the elements he highlighted was the store refurbishing project, which entailed “reviewing the offer and the display to emphasize products better.” He underscored that it was key to “change the static look as we want stores to be more dynamic with presentations that customers expect — they must find situations similar to what they see when they approach the brand digitally.” Bertelli said “a lot of work” had been done on pop-up stores in 2017 starting low-key in April and increasingly progressing through the year, which led to an “extremely successful, visible and impressive” itinerant Prada Silver Line retail project, which started at Macau’s Galaxy shopping mall in December, with exclusive, dedicated products, that helped engage new customers. The success of the pop-ups trickled down to Prada’s existing stores with a positive impact, he said.
As of Dec. 31, the group counted 625 directly operated stores. There were 25 openings and 23 closures in 2017.
Retail sales were down 8 percent to 2.4 billion euros, accounting for 81 percent of total, improving in the August-December period last year and partially impacted by the ongoing reduction in markdown sales. The wholesale channel was up 18 percent to 564 million euros, also driven by the partnerships with e-tailers.
Chief financial officer Alessandra Cozzani said the company had been experiencing foreign exchange headwinds, especially in the second part of the year, impacting 4 percent in the second half and 2 percent in the full year.
By geographies, sales in the Far East were down 1 percent to 973 million euros, representing 32 percent of total. Revenues in Greater China climbed 5 percent to 645 million euros.
Sales in the U.S. decreased 5 percent to 432 million euros, accounting for 14 percent of total, but the market registered a clear recovery in the latter part of the year, also confirmed in the first months of 2018.
Revenues in Europe edged down 1 percent to 1.17 billion euros, accounting for 39 percent of total.
Japan was weak in the first part of the year but showed an improvement in the final months highlighting stronger local demand and tourist flows and closed the year down 15 percent to 337 million euros, representing 11 percent of total.
The Middle East recorded a better second part of the year but overall it was down 11 percent to 93 million euros, or 3 percent of total.
Sales of ready-to-wear accelerated in the second half, showing 5 percent growth to 625 million euros, accounting for 21 percent of total. Bertelli touted a positive performance for both Prada men’s and women’s wear and for Miu Miu in the category across all main markets. “We exited the gray area and are in a much brighter spot for Prada and Miu Miu,” Bertelli said. “We’ve been able to attack issues on the industrial side and now we are working on distribution counting on new products.”
Leather goods were down 5 percent to 1.7 billion euros, accounting for 56 percent of total, but the company said the division showed encouraging trends in the second part of 2017, driven by many new products and iconic product lines supported by digital advertising and social media campaigns.
Footwear was down 8 percent to 624 million euros, although less so in the second part of the year, thanks to the success of new sneaker collections, such as Prada’s Cloudbust. Bertelli said the launch of Linea Rossa in August and the Luna Rossa sailing team project will also be a driver in the year. The team will once again be taking part in the America’s Cup in 2021. This is the first time for Prada as naming and presenting sponsor of the entire sailing competition providing additional brand exposure.
“We supplement with new lifestyle propositions on an exclusive basis in our stores, and not at wholesale unless [third-party vendors] are prepared to do pop-up stores,” Bertelli said.
He segued into the communication projects, including a Fondazione Prada exhibit at the newly restored historic mansion Rong Zhai in Shanghai, titled “Roma 1950-1965,” open to the public March 23-May 27, bringing together over 30 paintings and sculptures by artists ranging from Alberto Burri to Ettore Colla and Gastone Novelli, and curated by Germano Celant. “Some works belong to us others are lent from important museums,” Bertelli said.
“These complementary activities support business, and add new vitality to the brand perception,” he claimed, also mentioning Prada’s pop-up Double Club designed in collaboration with German artist Carsten Höller during Art Basel Miami in December.
Chiara Tosato, Prada general manager and digital director, said this channel is progressing “extremely well,” driving growth across businesses. The launch of a seamless, omnichannel e-commerce platform in China, customized to shoppers, allowed the company to be on track of a global rollout, she said, also citing wholesale success with Net-a-porter and Mytheresa.com, as well as with new partners Farfetch, Moda Operandi, Luisa Via Roma and Matchesfashion. “We remain confident in a double-digit growth in digital sales directly and through wholesale,” Tosato said. In 2018, the company is focused on offering “omnichannel tailored to specific needs and more personal service,” optimizing efficiency. To this end, it will launch the “Big Data” project with Microsoft to better understand customers and personalize service. Overall, digital sales now account for 4 to 5 percent of sales and the target is to reach 15 percent by 2020, she said. While the group’s web site remains the primary focus, Tosato did not rule out “conversations with the marketplace, possibly with Tmall for product distribution in China.”
Digital ads now account for 40 percent of media spend. Tosato ticked off the Black Nylon campaign to draw Millennials to the brand’s heritage material and the artistic collaborations as part of the Miu Miu Women’s Tales, among others. The sneakers are attracting generation Y customers below 26, she said. She added that 50 percent of sales were attributed to Millennials, and “even higher” in Asia.
Cozzani said like-for-like turned positive in the second half of 2017 excluding markdowns. She claimed it was reasonable to see in 2018 a mid- to high single-digit organic growth in the top line and an increase in operating margin by 50 to 80 basis points, although she said she had to consider the forecasts of a negative foreign exchange rate.
Bertelli explained that in order to offset problems related to negative foreign exchange rates, the company plans to “systematically check and review price efficiency for cost-related activities.”
He said products by the end of 2016 and in 2017 had a better price segmentation and handbags priced at between 1,400 and 1,500 euros were showing “positive results. There is no need to change that.” New products, he said, accounted for 60 percent of improving sales and Prada is selling around 700 Galleria bags per week.
Bertelli highlighted the mobility of tourists, saying it was “hard to provide a mapping of the tourist flows” as these also depend on local festivities, such as Ramadan or the Chinese New Year, which “all create a lot of opportunities.”
In the fiscal year, sales of the Prada brand were down 2 percent to 2.46 billion euros, accounting for 82 percent of the total.
Miu Miu was down 11 percent to 459 million euros, or 15 percent of total, impacted by a refurbishment program including 12 strategic closures and 90 renovations. “From 2018 there will be a turnaround of Miu Miu and it will become positive — it is already,” observed Bertelli.
Sales of Church’s decreased 12 percent to 71 million euros.
Capital expenditure amounted to 251 million euros in the 11 months of 2017 compared with 251 million in the 12 months of 2016, channeled into the store network and the development of the group’s industrial and operational capabilities.