Prada Moving on Up

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MILAN — Patrizio Bertelli sees a further shift into luxury for Prada.

The chief executive officer of the Italian luxury group has been spearheading a no-markdowns policy and slashing wholesale accounts since last year, but he spelled out his aspirations to further raise the profile of the brand during a conference call with analysts on Wednesday, commenting on first half results.

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“We have been thinking of the product positioning, and, as costs have increased, it would have been folly not to implement a minimum raise of our prices,” said Bertelli, speaking from the group’s Valvigna plant in Tuscany. Other luxury brands, such as Chanel and Louis Vuitton, also hiked their prices this spring in the wake of the COVID-19 pandemic, but Bertelli characterized the move as “a scientific exercise” and not across the board.

“I want to make it clear once and for all, there have been no markdowns and we cut the number of stores and the amount of product sold to certain wholesalers,” affirmed Bertelli in his staple no-nonsense way, responding to an analyst.

The executive touted the group’s quick reaction to the health emergency, underscoring that the first half of 2020 represented only “a temporary interruption” of Prada’s growth trajectory until the end of January, which, “in a situation of progressive control of the pandemic, we are confident will gradually resume from the second half of 2020, when our store network will again be fully operational.”

“I am sufficiently positive, it all depends on when the vaccine will be announced and when it will be delivered to countries,” Bertelli observed. “Values will change and how products will be distributed will also change, but the market is growing not declining. I think the strategy we are pursuing — to place the group in the high-end, luxury bracket — will allow us to achieve the contribution margins [we want].”

The move is expected to help the group to reach gross margin targets for 2021 of 75 percent.

Chairman Carlo Mazzi said that, “if another [coronavirus] outbreak is avoided, if the sales trend can be confirmed, and retail sales are flattish in the second half, the company could return to an operating breakeven at the end of the year.”

Prada in the period set in motion cost containment measures but, despite double-digit growth in June in the entire Asia Pacific region and triple-digit online sales growth during and after the global lockdowns, the closure of the group’s stores from February to May impacted its bottom line in the first half of the year.

In the six months ended June 30, the company reported a loss of 180 million euros. This compares with profits of 155 million euros in the same period last year, which benefited from the Patent Box tax relief relating to the years 2015-19.

Revenues in the first half amounted to 938 million, down 37.6 percent compared with 1.57 billion euros last year.

The company recorded a negative EBIT of 83 million euros before selling expenses of 112 million euros during the closure of stores, compared with 150 million euros last year, said chief financial officer Alessandra Cozzani.

Analysts, according to the Refinitiv’s Smarestimates consensus, expected a 35 percent drop in sales and a negative EBIT of 130 million euros.

“The current trading commentary was very positive compared to peers,” wrote Luca Solca, Bernstein’s senior research analyst for luxury goods, in his report on Wednesday, characterizing the performance as “a miss, but for the good reasons.”

He elaborated, stating that he sees “that the miss in revenue and profit expectations is primarily due to the good reasons: a very material cut of wholesale exposure. This is for the better, as reduced wholesale is a prerequisite to better safeguard of brand equity and online development.”

Pointing to Prada’s “renewed brand traction,” he concluded writing: “We believe Prada is currently the most preferable self-help story in our coverage.”

Bertelli expressed his pride in the “commitment and sense of responsibility demonstrated in these circumstances” by the group’s employees and “the excellent response of local consumers” once the stores reopened, contributing to a positive attitude during the call.

In the first half, retail sales were down 32.2 percent  to 835 million euros, representing 90 percent of sales.

Wholesale revenues were down 71 percent to 91 million euros, accounting for 9 percent of the total, reflecting the strategic decision to downsize this business for stricter control and the protection of brand positioning.

On average, 40 percent of the retail network was closed from February to May, reaching a peak of 70 percent in April.

Lorenzo Bertelli, head of marketing and CSR, said the group saw triple-digit growth in its online channel across all markets and across all product categories. He said the online business was up 150 percent in the first half and reached a peak in June, climbing 300 percent.

The company in the period revamped the Prada web site across all major markets and the brand’s e-commerce in the additional key markets of South Korea and Brazil.

In the first half, sales in Europe were down 41 percent to 228 million euros, representing 27 percent of the total.

Asia Pacific, which represents 44 percent of total sales, was down 18.7 percent to 370 million euros. The region posted strong double-digit sales growth since April in Mainland China, while South Korea and Taiwan, which didn’t experience store closures, showed a consistent double-digit trend throughout the period.

Thanks to the contribution of these markets, the entire Asia Pacific region reported double-digit growth in June, despite Hong Kong and Macau still being negatively affected by the lack of travel flows. Taiwan and China have been up 50 percent since July, said Patrizio Bertelli.

Cozzani said that retail sales in Mainland China were up 60 percent in June and up 66 percent in July.

Sales in the Americas fell 41.4 percent to 96 million euros, representing 12 percent of the total, with current trading improving. Patrizio Bertelli addressed the issues affecting department stores in the region, including the bankruptcies and their missed payments. His approach is one of “wait-and-see,” but he said that business was offset by a strong e-commerce performance in that market. He also noted that the region was not much impacted by travel restrictions as the group has always mainly sold to locals in the U.S.

Canada has also shown sustained growth since the reopening of stores.

Sales in Japan, accounting for 14 percent of the total, were down 36.5 percent to 113 million euros, showing a recovery driven by local consumption.

Revenues in the Middle East were down 43 percent to 28 million euros, with mixed trends as Dubai is still suffering from the lack of tourism but other markets in the region were sustained by better local consumption.

Bertelli said that the group had seen a better-than-expected recovery in Turkey and Russia, growing double-digit, and Germany. Europe was still feeling the lack of tourist flows.

Operating expenditures declined by 12 percent to 743 million euros.

All the costs pertaining to the retail network during the closure period net of savings amounted to 112 million euros, or 18 percent of selling expenses that couldn’t generate revenues during the period.

Capital expenditures amounted to 49 million euros, compared with 177 million euros in the same period last year, and were limited to corporate, industrial, IT and retail.

Cost-cutting included the renegotiation of several lease agreement conditions, canceling or postponing marketing initiatives and shrinking discretionary costs, said Cozzani.

Mazzi underscored that the group has been strengthening the organization for the future with new leadership appointments. As reported, Christopher Bugg was appointed director of group communications; Benedetta Petruzzo was named Miu Miu general manager, and Luxottica alum Massimo Vian joined as chief of industrial production.

Raf Simons in February was appointed co-creative director with Miuccia Prada. The design duo will show their first joint collection in September for the spring-summer 2021 season but no details were provided about this event in response to an analyst’s question.

The group’s production activities were impacted by the lockdown, with 21 factories shut down for about five weeks and then resuming operations beginning in the last week of April, enabled by the implementation of protective measures, including systematic temperature testing of all employees. For this reason, seasonal products were delivered on time, and there were no extraordinary inventory write-downs, explained Cozzani. Patrizio Bertelli underscored that all employees had been paid their full salaries during the crisis.

In April, the board withdrew its recommendation to pay a dividend for 2019. This decision, combined with a reduction in costs and investments, has allowed the group to maintain a stable financial position, which stood at a negative 515 million euros, compared with a negative 406 million euros at the end of December last year. The company has had access to an additional credit line for liquidity of 1.2 billion euros.

 

 

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