MILAN — Italian luxury goods maker Prada SpA reported a 25 percent drop in net profit in the first half of the year on lower sales and vowed to continue with an aggressive cost-cutting program to protect margins as it seeks to return to a path of “sustainable sales and profits growth.”
That goal, Prada Group chairman Carlo Mazzi said on a conference call, should be reachable “from as early as 2017.”
Prada reported that revenues dropped 15 percent in the period (13 percent at constant exchange rates), to 1.554 billion euros amidst a challenging economic climate especially in the group’s key markets of China and Asia-Pacific. Net profit in the six months to end-June dropped to 141.9 million euros compared to 188.6 million euros in the year-earlier period.
During the conference call, chief financial officer Alessandra Cozzani said that “sales continued to be impacted by tough trading conditions” in all markets. But she pointed out that despite the slide in sales, the company managed to maintain a stable gross margin, following success in implementing industrial efficiencies.
Sales in Europe, which accounts for some 35 percent of group sales, dropped 21 percent in the period. In Americas (13 percent of revenues) they were down 17 percent. But it was the Far East, which includes Greater China (mainland China, Hong Kong and Macau) and represents some 36 percent of sales that impacted the topline most. In Japan (13 percent of revenues) sales slid two percent, while in the Middle East (three percent of total sales) they were essentially flat.
Cozzani said that the Far East “remains challenging,” although she pointed out that in Hong Kong and Macau the downward trend stabilized compared to the same period last year. She said that mainland China has demonstrated “encouraging improvements” thanks to repatriation of domestic consumption to the Chinese market.” She said that already since the beginning of the year, the trend was still negative but no longer deteriorating, “so a kind of stabilization has been seen over the past six months.” She added that over July and August, there had been a “real sign of improvement” in China, Hong Kong and Macau.
Europe was hit by a sharp decline in tourist flows, which has continued since late last year following security concerns. But domestic consumption was strong, she said. She added that the U.K. “has recently turned positive,” while Russia was “good” and — in more general geographic terms — Mexico and Brazil were “very good.” The Middle East was “most resilient,” with sales driven by local consumption, Cozzani said, adding that wholesale e-commerce initiatives with sites Net-a-porter.com and mytheresa.com were very successful.
Cozzani also pointed out that the company has been taking many actions to reduce costs, and that “strong progress on cost savings allowed us to deliver stable operating margins in [the first half].” She said that operating expenses were down 12 percent year-on-year as the company has been “very rigorous to create a leaner, more flexible organization.” She pointed out that the company has, for example, reduced labor costs by freezing hiring and that by systematically meeting landlords the company has already managed to get better rent deals “across Asia-Pacific.” Thanks to these and other initiatives, the company said that the earnings before interest and taxes margin increased to 14 percent of sales, up from 12 percent of sales in the second half of 2015.
Still, improving results in the second half of the year seems unlikely. Answering an analyst’s question on prospects for the rest of 2016, Cozzani said attaining growth in sales and earnings to year-end would be “quite challenging. It’s early. We have seen some signs of improvement. We are expecting a better [second half] but it’s difficult to think that the second half of the year will have a positive trend.” She pointed out, though, that the company’s second quarter was better than the first quarter and that “August is trading close to what we have seen in the second quarter.”
Further savings in operating expenses will come from the continued “optimization” of the retail network to “be leaner and more in line with customers’ needs,” Stefano Cantino, group strategic marketing director, said. He said the group would continue to focus on refurbishing better-performing locations and that so far this year 16 such refurbishments have been carried out. The company is targeting 20 new store openings and 25 closings for all of 2016, he said.
Cantino said the company was pushing on its e-commerce and web presence — efforts that he had earlier said would lead to a rebalancing of the group’s advertising budget away from traditional media in favor of digital media. “We have a strong platform to progressively grow thanks to two key initiatives which show strong signs of progress,” Cantino said, referring to the group’s partnerships with Net-a-porter.com and mytheresa.com. He said the company also plans to roll out its e-commerce platform to all major markets over the next two years, something that will represent “a major milestone that will reinforce our presence in strategic countries” and would first hit China, Hong Kong and Singapore.
A focus on product will be another driver of improving sales and margins. Cantino said that novelties — at times like embellishments on existing lines — are important. In terms of new products, he said the Esplanade — a new two-handle bag in three sizes — is performing “really well” and can already be considered an “‘It’ bag.” He said that “ideally” the company would have a consistent flow [of new products], every two months. ”
Answering an analyst’s questions on price points, Cantino said: “The key point is we have to cover all price ranges. There are lots of opportunities at each price range, at the highest one and at the entry one. What is key is to have novelties for each price range and even on the iconic bag to have embellishments, new additions, new materials and, of course, [something] that gives to the product a new flavor and new image.”
Cantino also highlighted the importance of the group’s licensing business. He said that licensing “continues to show good momentum.” New fragrances for Miu Miu and Prada have been received well, especially La Femme and L’Homme, Prada’s new fragrances for women and men, launched together for the first time. Eyewear is also a promising licensing channel, with the company’s new MOD and Miu Miu Scenique collections having “overperformed the market.”