Patrizio Bertelli

MILAN The timing of Prada’s turnaround has become a guessing game.

While the Italian luxury brand’s chief executive officer Patrizio Bertelli naturally remains bullish, the continuing steep decline in the company’s profits and sales in the first half raised further questions over when Prada might be able to rebound and catch up to fast-growing competitors like Gucci.

Prada on Friday reported an 18.2 percent decline in net profit for the six months ending July 31 to 116 million euros, compared with 141.9 million euros in the same period last year. Revenues decreased 5.5 percent to 1.46 billion euros, compared with 1.55 billion euros last year.

Writing about the results, Citi analyst Thomas Chauvet titled his report “Getting Used to Disappointment,” noting that the timing of the group’s turnaround “remains highly unclear” and that it is underperforming the sector year-to-date.

Rogerio Fujimori at RBC Europe Ltd. said his “main takeaway from the [conference] call today is that a return to positive sales growth should take longer than previously expected. As we said before, being iconic is not enough.”

But Bertelli, on the call, firmly stuck to his view that Prada’s integrity and fashion stance are instrumental in returning the group to growth. “We believe that, unlike others, we serve as a guiding light. Quality will pay in the future,” he said. “The new generation of customers expects us to show our identity, [to make a] fashion statement and surprise with breakthrough [products]. We stand for attitude. When a new brand emerges, the new generation is curious and the more established brands need to engage consumers in commercial activities, with an imagery that we can provide.”

The group is going through a phase of restructuring and Bertelli pointed to its ongoing digital transformation, which he believes will deliver long-term growth. “The extensive overhaul of Prada Group’s cost structure creates operating leverage that will allow group profits to benefit rapidly from revenue growth. In the meantime, we will continue to protect cash generation by keeping net working capital and investments under control.”

Bertelli said the company has “not seen the full impact” of its digital transformation, which still needs to be implemented in China, Korea and Japan. The executive hired Chiara Tosato as general manager and digital director, who joined in March, and during the call she spoke of the group’s three goals: to drive online sales, develop a seamless omnichannel experience and increase investments in digital communication.

A localized e-commerce platform has been rolled out in Europe and the U.S. and will reach China, Korea, Japan, Russia and Australia by the end of the year, and the Middle East and Latin America in 2018. Tosato said the platform allowed “a simpler user experience and a view of inventory,” explaining it is integrated with social networks, with a login directly from Facebook, for example.

“We are working with 10 different languages, and each local site is customized and updated,” said Tosato. “We have already launched Prada’s and Miu Miu’s ready-to-wear and the goal is to have everything online by the end of the year.”

Tosato said the company also has a “very successful” relationship with its luxury online retailers, ranging from Net-a-porter and to

Services already in place include shopping online and store pickup and personal shoppers and Tosato is working on in-store purchase followed by delivery of the product at home and on “seeing the product, uploading it online and buying it later from your account.” Same-day delivery is expected by the end of the year. She also noted that the group has 18 million Instagram followers. The target for digital sales is to reach 5 percent of revenues by the end of 2018, once the digital transformation has been completed, she said.

While investing in the digital channel, Bertelli noted that the retail network “remains the most important touch point.” In the six months, the retail division was down 7.8 percent to 1.17 billion euros, or 82 percent of sales, impacted by the decision to drastically reduce markdowns. The group opened six stores and closed 13 units, for a total of 613 directly operated units.

Bertelli underscored that the diversification of the store concept in resort locations such as St. Barth, Porto Cervo and St. Tropez, had lifted sales and that pop-ups helped create new customer experiences. He cited the takeover of the Galeries Lafayette space in Paris with the new best-selling Etiquette bag, My Character customization project and Stickers designs as “interesting and successful,” helping to reach out to Millennials. The wholesale channel was up 5.1 percent to 265 million euros.

“We are transforming the company to be more in line with consumers and the different situations that are emerging,” said Bertelli, expressing his concerns about geopolitical issues.

In the six months, earnings before interest, taxes, depreciation and amortization were down 15.3 percent to 279.6 million euros, representing a margin of 19.1 percent of sales. Operating profit decreased 21.9 percent to 166.8 million euros.

Leather goods showed a 7.5 percent decline to 827 million euros, accounting for 57 percent of sales. That said, Bertelli touted “the excellent reception” of new styles such as the Etiquette, Cahier and Paradigme bags. He also noted a return to soft styles as a plus for Prada, trumpeting the group’s expertise with these kind of designs.

Footwear was down 9.8 percent to 310 million euros, representing 22 percent of the total. Bertelli admitted the company had underestimated the popularity of sneakers and was working to catch up on this lucrative business, with additional designs to be delivered in mid-October. “We made the wrong strategic decision, but we are now equipped to serve that segment. Customers are more into sneakers than we expected and we started correcting the problem,” said Bertelli, conceding that “when a product is popular, you miss out if you are not there at the beginning. We monitor the situation but we keep our identity with traditional footwear.” He noted that the company is enriching its product offer in the upper price range as it also works on intermediate pricing.

Ready-to-wear grew 4.6 percent to 274 million euros, representing 19 percent of total sales. “I’m not surprised it’s performing well, it’s the right product,” the ceo remarked.

Bertelli during the call challenged Exane BNP Paribas analyst Luca Solca, who asked if the delay in the digital execution compared to peers such as Gucci and Louis Vuitton was the only element that needed fixing so as not to lose market share to other megabrands.

“Well, in the past, when you were asking questions, you always mentioned other brands that have disappeared from sites. So, apparently, you are more selective right now. But, anyway, the two brands you’ve mentioned are certainly those that are anticipated more than everybody else their presence in the digital world. There is a big mistake here. When you speak of digital, people tend to think it’s a question of IT systems and so on and so forth. Personally, I think that digital and everything connected to it is a question of marketing more than the IT systems themselves, and it’s more about strategic marketing actually.”

Bertelli said perhaps Prada was late in the game, but that the actions taken so far have “been pretty good,” and that “the right decisions” had been made. He waved away concerns about the products.

“Both Prada and Miu Miu are brands that, as you may see from the fashion shows and the reception for the press, are always fashion-forward. So, whatever we hear about change in designers and so forth, it’s just ridiculous for us because, I mean, many, many times new designers are acclaimed and then they just go after a couple of collections. Chanel has been — Karl Lagerfeld is there for forever. He’s 80 years old [he’s 83] and no one ever thinks of getting rid of Karl Lagerfeld, right? So, I would stay away from lots of statements that don’t really make sense.”

In a further breakdown of the results, the Prada brand was down 4.6 percent to 1.17 billion euros, accounting for 82 percent of the total, dented by the reduction of markdowns but showing an improving trend versus the second half of 2016. Sales of Miu Miu decreased 10 percent to 224 million euros impacted by the closure of eight stores in the period. Church’s was down 15 percent to 34 million euros, impacted by the restructuring of the wholesale channel.

The Asia-Pacific region was up 0.4 percent with sales of 463 million euros, representing 32 percent of total sales. At constant exchange, sales were down 0.6 percent. Greater China saw a 5.2 percent increase at constant exchange and growth was also seen across Macau and Hong Kong. Sales in the America decreased 3.7 percent to 210 million euros, accounting for 15 percent of sales. Bertelli lamented the lack of visibility at Prada’s Fifth Avenue store caused by the daily protests in front of the Trump Tower. At constant exchange rates, sales were down 5.8 percent. A positive performance for the period was seen in both Mexico and Canada.

Europe was down 7.7 percent to 554 million euros, hurt by the strength of the euro, especially in the second quarter, as well as the stabilization of the U.K. market and safety concerns following the terrorist attacks there. Market conditions in Japan remained unchanged, with sales declining by 14.2 percent, highlighting weak consumption by domestic customers and tourists and reaching 164 million euros. The Middle East was down 11.7 percent, due to ongoing geopolitical tension, which impacted tourist flows within the region.

Chief financial officer Alessandra Cozzani said the cost-control program launched last year delivered results despite the increased costs in support of the digital and communications strategy. 
Investments for the period amounted to 105.6 million euros, channeled into the retail network, where the group has completed 100 projects aimed at bringing the image of the stores in line with new design concepts, and to the strengthening of the supply chain to further develop the group’s industrial and logistics capabilities. “Investing in the brands is the highest priority, but we have continued on our industrial efficiency, on a cost reduction for a leaner and more efficient company and a normalized capital expenditure,” said Cozzani. The company has completed its investments in logistics, with two new warehouses.

Cozzani said the company will change its fiscal yearend to Dec. 31, starting in 2017, from Jan. 31.