MILAN — Prada’s business transformation strategy, with the elimination of markdowns, is paying off — although the coronavirus outbreak is clouding the business outlook.
The Italian luxury fashion house delivered improved results last year, registering an acceleration in the second half that continued until the end of January, when it was interrupted by the health emergency.
Reporting a 24.5 percent jump in profits and a 2.7 percent increase in revenues in 2019, Prada chief executive officer Patrizio Bertelli characterized the year as one of “strong progress. The combination of investment and operational initiatives implemented over the past few years is now clearly translating into brand heat and sales. We are sure that our commitment to guarantee outstanding quality standards as well as strengthening brand desirability has been the right choice to support profitable and sustainable long-term growth.”
Following what he defined as a “very buoyant” start of 2020 for the group, the coronavirus spread interrupted this upward trajectory. “This is a huge and unprecedented event that will draw deeply on our sense of responsibility. Our full concern and support go to the people that are facing these tough times. The safety and the well-being of our colleagues as well as of our customers all over the world are of the greatest importance to us and we will do everything we can to help overcome this crisis together,” continued Bertelli. “Although it is difficult to forecast the evolution of the epidemic, we are expecting a negative impact on this year’s results and we are implementing a comprehensive contingency plan to mitigate it, relying on our flexible supply chain and lean organization. The soundness of our financial structure gives us the confidence to overcome this exceptional moment and to be ready to capture the recovery when it arises.”
Last year, net earnings rose to 256 million euros, lifted by the Patent Box tax benefit for the 2015-19 period, and compared with 205 million euros in 2018.
Revenues totaled 3.22 billion euros, compared with 3.14 billion euros a year earlier.
Operating profit was down 5.3 percent to 307 million euros.
Although Prada’s conference call with analysts slated for Wednesday was canceled, Bernstein’s Luca Solca weighed in, stating the set of results was “an encouraging update, but the focus will be on COVID-19 impacts.” According to Solca, Prada “has continued to implement a more stringent approach to in-store discounting (now completely eliminated) and wholesale (reduced in part, more to appear in [fiscal year 2019-20].”
He said that, even “more importantly, full-price sales traction continues to increase, with midteens progression in fourth-quarter 2019 versus midsingle digits in [third-quarter 2019]. We recently upgraded Prada, as we expect its traction to increase — also on the back of minimalism coming back to consumer relevance, as COVID-19 will likely change the zeitgeist away from ‘maximalism.’ Things will have to get worse before they get better, as Prada will not be immune to the harshest trading conditions in history,” during what is expected to be a tough first half of 2020 for fashion brands in general.
Prada touted its investments in the “distinctive values and identity” of the brands in its stable, mirrored by strong growth in full-price sales, accelerating in the final quarter. “Buzz around the brands is growing, driven by creative communications and initiatives focused on sustainability, now an essential part of our business strategy,” said the company.
By brand, Prada sales last year rose 3.3 percent to 2.64 billion euros, representing 83 percent of the total. As reported, in February Raf Simons was appointed as co-creative director with Miuccia Prada, a move that “reaffirms innovation as a quintessential facet of Prada’s identity,” said the company. Simons starts April 2, and the duo’s first codesigned collection is to be unveiled for spring 2021.
Sales of Miu Miu inched down 0.7 percent to 450.5 million euros.
Prada and Miu Miu achieved double-digit increases in full-price sales in the second half, “with new collections very well received across markets and categories, supported by online and in-store initiatives,” said the company.
Church’s was up 1 percent to 69.8 million euros.
Licensed businesses generated royalties of 42.3 million euros, down by 4.1 percent, essentially as a result of a decline in the eyewear segment. “In response to this decrease, the group and the licensee are implementing a sales strategy more closely aligned with the demands of the local markets and better integrated with the brands,” said the company. Prada’s eyewear is licensed to Luxottica.
Sales of leather goods inched up 0.5 percent to 1.76 billion euros, accounting for 55.5 percent of the total. Apparel climbed 9.5 percent to 729.3 million euros, driven by a double-digit increase in full-price sales across all geographies. Footwear was up 1.8 percent to 627.5 million euros, including double-digit full-price sales growth in the second half, sustained by the ongoing strong demand for sneakers and lifestyle collections.
Revenues in Europe were up 3.2 percent to 1.22 billion euros, representing 38.6 percent of the total. Sales in Asia Pacific inched down 1.7 percent to 1.01 billion euros, accounting for 32 percent of the total. Revenues in the Americas rose 6.9 percent to 455.4 million euros, and those in Japan were up 10.2 percent to 386 million euros. Sales in the Middle East and Africa were down 1.2 percent to 94.4 million euros. Other countries were up 31.1 percent to 1.4 million euros.
Retail sales were up 4.1 percent to 2.63 billion euros, representing 82.8 percent of the total. The company also provided retail figures per market, showing improvements across all geographies. The comparison with the 2018 data is affected by the decision to phase out markdown sales from the initial months of 2019, which resulted in a decrease of 110 million euros in retail net sales. Europe was up 6 percent, driven by locals and tourists; America was up 11 percent, supported by local customers; the Asia Pacific region was down 2 percent, negatively impacted by the protests in Hong Kong. Excluding this, retail sales were up 5 percent.
The momentum of full-price sales accelerated in the second half, with double-digit growth and outperforming in South Korea and in Mainland China. Japan was up 9 percent with solid regular sales across the period, despite the VAT increase in October, while the Middle East was down 1 percent.
As of Dec. 31, there were 641 stores, an increase of five units from 2018. The increase reflected 21 closures, 22 openings and the four Prada stores in Milan acquired with the purchase of Fratelli Prada SpA at the end of October last year.
The wholesale channel was down 3.3 percent to 547.2 million euros, accounting for 17.2 percent of the total. The decrease was in line with the decision to rationalize the network of independent clients to ensure the brand’s exclusivity.
During the period, the group generated operating cash flow of 362 million euros, compared with 365 million euros in 2018.
Capital expenditures throughout the period were mainly channeled into retail and amounted to 302 million euros, including the acquisition of a retail property in Madrid.
On March 1, Prada signed a sponsorship agreement with Challenger of Record 36 Srl (COR 36), a related company in charge of organizing and managing the preliminary activities of the 36th America’s Cup. The contract provides for a financial commitment of up to 23 million euros until the end of 2021. On Wednesday, after Prada’s Luna Rossa’s first sailing races in Sardinia, slated for April, were postponed due to the coronavirus emergency, the event was canceled.