MILAN — Prada is on a roll.
First, its men’s wear show here Monday was one of the standout presentations of the spring 2004 season. Then Prada chief executive officer Patrizio Bertelli revealed the company is bucking the luxury sector’s wobbles and forecast its net profits this year would leap at least 30 percent above the $31.1 million seen in 2002. The improvement stemmed from the group’s aggressive cost-cutting, he said.
Prada’s sales this year should be roughly in line with 2002’s $1.81 billion, Bertelli predicted. In euro terms, Prada had net profits of 27 million euros on sales of 1.57 billion euros in 2002.
His forecast is a bright spot in the luxury sector, which has been hit by the Iraqi war, SARS and the weak global economy. Most analysts had pretty much written off 2003 as another tough year for luxury and didn’t expect any significant upturn until 2004.
But Prada’s cost-cutting has enabled it to buck the trend. The group has been looking for ways to chip away at its net debt, which stood at $807.2 million at the end of last year, a result of its acquisition spree in the Nineties. Earlier this month, it formed a joint venture with Aedes SpA to create Real Estate International Srl, which will acquire a number of Prada-owned real estate assets by the end of the year for about $116.8 million. It also called off plans to move its existing store in San Francisco to a Rem Koolhaas-designed flagship, putting the site on the market. In April it sold a 45 percent stake in Church’s, the English footwear brand, to Equinox Investments for an undisclosed sum.
These deals followed last year’s sales of its remaining 25.5 percent stake in Fendi to LVMH Moët Hennessy Louis Vuitton and the disposal of Byblos to Swinger International. Prada’s holdings now include Jil Sander, given a boost by the May return of the namesake designer; Helmut Lang; Azzedine Alaïa; Car Shoe, and Genny.
Of course, Prada continues to spend when it wants to. Two weeks ago it opened a 28,000-square-foot Epicenter store in Tokyo’s Aoyama district designed by Herzog & de Meuron of Switzerland. The store, including the land, cost $83.3 million and, Bertelli said, represents the largest single investment by an Italian company in Japan since the end of World War II.
In an interview at the opening, Bertelli forecast the store would have sales of $20.8 million or more in the first year and Prada would be able to continue to buck the difficult trend in the luxury market for the foreseeable future. The group maintained an average annual growth rate of 6 percent worldwide from 1992 to 2002, he said.
Prada also is benefiting more than just financially from its new linkups. This month’s real estate deal with Aedes will enable the luxury group to maintain control of its real estate while providing it with additional operational funds, analysts said at the time. While it will have the added cost of rent, the joint venture will allow it to further cut its debt, related interest rates and management costs, analysts said. Aedes will own 80 percent of the new venture and Prada the remainder. Prada said at the time it might pursue “similar transactions” with Aedes in Italy and internationally.
Meanwhile, Prada believes the Church’s deal will provide it with the funds to take the traditional English men’s shoe company to the next level as a brand — and expand it to other categories. It’s less sure whether any more such linkups for its other brands are down the road.
“Each brand has its own history and what works with this label may not necessarily work with others,” said Riccardo Stilli, Prada Group’s chief financial officer, in an exclusive interview. “I believe Equinox found an interesting package in Church’s: The company is profitable and it has potential and, although we did not touch the product, Prada completely overturned Church’s distribution and reinforced its image around the world for some years.
“We believe the brand has an enormous growth potential in other areas, such as clothing and accessories,” continued Stilli, noting shoes accounted for 95 percent of Church’s sales last year, which were $69 million, or 60 million euros. Dollar figures have been converted from the euro at current exchange rates.
A thorough business plan will be outlined by the end of 2003, although the agreement with Equinox Investment won’t be finalized for another few weeks. Stilli said the company plans to add men’s cashmere knits, leather jackets, briefcases and slippers. Currently, Church’s offers a selection of small leather goods, belts and ties. The new items will be available at brand stores and in a select number of sales points.
Through the partnership with Equinox Investment, Prada aims to boost sales of Church’s to $103.5 million in two years and to more than $115 million in 2006, said Stilli. In addition to Church’s, the company puts out a younger, less expensive brand called Cheaney. Church’s women’s division accounts for 5 percent of sales, and there are no plans to change that figure significantly. This line is all produced in Italy.
Stilli said Church’s currently produces 5,000 pairs of shoes per week, compared with 3,700 pairs back when Prada bought it.
He declined to disclose the financial terms of the agreement with Equinox Investment, but firmly denied press speculations here that Prada sold 45 percent of Church’s to the investment group for about $36.8 million — a significant discount compared with the price Prada originally paid for total control of the English brand four years ago: $175.5 million, or 26.5 times the company’s net earnings back then.
“Since we have a partner and we have agreed not to reveal the price, I can only say that Prada realized a gain with this sale,” said Stilli. “This gain is rather substantial and will allow us to develop Church’s and to reduce our debt at the same time.”