MILAN — Prada is the latest brand struggling to figure out the New World Order.
This story first appeared in the December 8, 2014 issue of WWD. Subscribe Today.
In releasing the luxury group’s nine-month results, which saw profits dive 27.6 percent, Prada SpA chief executive officer Patrizio Bertelli admitted that the year 2014 “is proving to be a more challenging year than expected,” adding that, “On top of the ongoing difficult international economic environment, the luxury goods market is undergoing a certain readjustment, the extent of which is not yet entirely clear.”
Chief financial officer Donatello Galli echoed Bertelli’s comments in a conference call with analysts, underscoring the changes in the luxury market, which is seeing “a different perception of products,” complicated by geographic and socio-political issues. “We are observing, and the changes are not entirely clear. The identity of the market is more complex than in the past,” said Galli.
Prada was the latest firm to admit to struggling with the changing fashion landscape after Millard “Mickey” Drexler 3rd, J. Crew’s chairman and ceo, told WWD, “Apparel spending is down across our industry. It’s common knowledge that store traffic has been down for the past couple of years. Customers are shopping online more than ever, and the promotional environment is like I have never seen before. Clearly, this is not business as usual. The world is changing, and customer behavior and expectations are changing even faster.”
In his comments, Galli noted that a “fairly interesting meeting of the [Prada] board” had been held on Friday, admitting the results were “below expectations and not only for external reasons,” but that the group was “standing by its fundamentals.”
Bertelli said he was “confident in the medium-term growth prospects of the market but also aware of its increasing level of complexity.” Against an “extremely challenging” scenario in 2014 and in light of a dearth of changes perceivable in the short term, the ceo expressed conviction that Prada had “made the right choice in continuing to prioritize the group’s medium-term development through investments focused on achieving qualitative and stylistic excellence.”
Galli pointed to the life cycle of certain products that need to be addressed with a more-balanced merchandising mix.
Prada’s bottom line in the nine months saw a drop in net profits to 319.3 million euros, or $427.8 million. Unaudited three-month profits dropped 43.9 percent to 74.4 million euros, or $96 million, from 132.6 million euros, or $177.6 million, and three-month revenues dropped 5.6 percent to 800.7 million euros, or $1.03 billion.
Profits were hurt by ongoing depressed consumer spending and less tourism in Europe as well as a slowdown in the Asia Pacific region, which was dented by the Hong Kong protests and softer business in Macau, where gambling activity has seen a 17 to 20 percent drop, said Galli. There was a 6 percent decrease in sales of leather goods, offset by a 19 percent gain in the footwear category, and a slowdown at the Prada brand, which was down 1 percent, although the men’s segment performed “particularly well.” This was offset by a 4 percent growth at Miu Miu.
Revenues were in line with last year, edging down 0.9 percent to 2.55 billion euros, or $3.41 billion, compared with 2.57 billion euros, or $3.39 billion. At constant exchange rates, sales would have risen 0.5 percent.
All figures have been converted at average exchange rates for the period in question.
During the call, Stefano Cantino, the group’s director of marketing, communication and commercial development, touted Prada as “one of the most desirable brands in luxury.” He also addressed the group’s efforts to strengthen the label’s product mix with new items that engage its customers, expand the entry price range and are supported by marketing actions in all regions. “We don’t feel under attack from any entry price points. The market is crowded and more competitive, but Prada and Miu Miu [leverage] incredible brand awareness and credibility,” boasted Cantino.
Responding to an analyst’s questions about the slowdown in leather goods, he said the company is developing new products with a new price range of around 1,000 to 1,200 euros, or $1,377 and $1,652 at current exchange, “aligned with the image of Prada and Miu Miu, but there will also be a big opportunity” at a higher range between 2,500 and 2,700 euros, or $3,442 and $3,718. Cantino said the company continues to support Miu Miu and that it will once again present its pre-fall collection in Paris in January. Also, a new fragrance will bow in the third quarter of 2015.
Cantino also highlighted the group’s investments in digital communication and dialogue using social media. “We feel we have to invest not only in e-commerce but also to improve the relation between online and off-line. We want to increase the e-commerce offer but maintain the image at the same level of the retail network, without diluting it.” A newly designed and improved prada.com Web site was just relaunched, as reported.
In his report on Friday, Citi analyst Thomas Chauvet said, “Prada shares have underperformed the luxury sector year-to-date” — down 32 percent versus a 1 percent gain in the sector — “following significant underperformance in 2013,” down 7 percent versus a 15 percent gain in the sector. But he said he “believe[s] the worst of the negative news flow is probably behind us now and largely factored into re-based consensus expectations.”
In a Bernstein research note, analyst Mario Ortelli said, “Overall, whilst we believe the actions undertaken by management will yield positive results in the medium term, we continue to anticipate short-term headwinds for Prada Group and maintain our Market-Perform rating.”
Geographically, in the nine months, the group’s sales in the Far East were down 4 percent to 824.5 million euros, or $1.1 billion, challenged mainly by the performance in Hong Kong, which had been weak in the previous months and further deteriorated in October due to the ongoing demonstrations there. Hong Kong will be “central for 2015 and in the long term,” said Galli. Addressing the continuing protests, he said, “All brands are trying to understand where the city is going — it’s [too] early to say if it’s going this way or that way. We are closely watching to understand what to do.”
But Galli reported a “positive sentiment” from Hong Kong as well as a “willingness” in the Chinese “to consume and travel.” As for Macau and whether the “number of visitors will increase or shift to more-refined locations, it’s a gamble,” he said, with a pun on the city’s main draw. “The situation is evolving in both Hong Kong and Macau and in Russia, too,” he added.
The Americas grew through local demand and were up 6 percent to 270.6 million euros, or $362.6 million, accounting for 12 percent of sales.
Revenues in Europe dropped 1.8 percent to 751 million euros, or $1 billion, representing 22 percent of sales.
Japan was up 8 percent to 257.1 million euros, or $344.5 million. At constant exchange rates, sales would have risen 15.3 percent.
The Middle East posted a 9.8 percent gain to 66.9 million euros, or $89.6 million.
In the nine months, leather goods were down 6 percent to 1.44 billion euros, or $1.92 billion, while footwear rose 19 percent to 323.2 million euros, or $433 million. Sales of ready-to-wear rose 7 percent to 359.2 million euros, or $481.3 million.
Capital expenditures totaled 353 million euros, or $473 million, compared with 416 million euros, or $549.1 million, in 2013. Galli touted the group’s “overall efficiency, the cut of discretionary costs in the past three or four months.” He said he was “cautious” about the last quarter, though “confident in growth.” He said he could not provide guidance for 2015 because of “low visibility.”
Prada shares on Friday dropped 1.56 percent to 47.25 Hong Kong dollars, or $6.09.