The Prada Group posted a 23.0 percent decline to €188.6 million for the first half ended July 31 but booked a strong increase in operating margins during the second quarter, and the management expects to report further improvement for the rest of its financial year.
The group's net revenues rose by 4.2 percent in the first half to €1,824 million, with retail sales up by 7.6 percent to €1,552 million and wholesale revenues down by 13.8 percent to €249 million. At constant currency rates, overall revenues were down by 6 percent, with retail falling by 3 percent and wholesale decreasing by 20 percent.
Retail sales continued to be affected by a negative performance on a same-store basis, even though the trend improved in the second quarter as compared to the first three months of the year. Wholesale revenues were hit by the group's policy to prune accounts to avoid parallel imports as well as by a significant slowdown in sales to duty-free shops in South Korea due to the outburst of the Middle East Respiratory Virus (Mers) in the country. With Mers said to be basically over since July, shipments to Korean duty-free stores have resumed in the past few weeks, and the company expects its total wholesale turnover to be steady year-on-year for the second half.
In Europe, the group's retail sales were up in the first half by 12 percent at current currency rates, and by 11 percent at constant exchange rates, reaching €541.6 million, with sales accelerating in the second quarter compared with the first. European sales were lifted by purchases made by Asian and American tourists, taking advantage of the weak euro, together with a recovery in consumption by domestic customers. The U.K., however, was hit by a shift in buying habits by Russian tourists, who now prefer to make their purchases in their own country. Prada noted that Russia has been its best performing market in the past three or four quarters.
Meanwhile, sales in the Asia-Pacific region fell by 1 percent to €557.6 million due to ongoing difficulties in Hong Kong and Macau, which offset double-digit growth in mainland China in both quarters. In local currencies, sales dropped by 17 percent in the region. In Greater China alone, sales fell in the first half by 5 percent in euros and by 23 percent at constant exchange rates, down to €368.4 million. The group pointed out that part of the sales lost in the region where recouped in Europe and Japan.
Prada reiterated the difficulties faced in renegotiating leases in Hong Kong, but the management remained confident that landlords will soften their stance to avoid “some of the big names” leaving the former British colony. The company's chief financial officer, Donatello Galli, said that he is slightly more positive about the future of Hong Kong than Macau, whose fortunes rely on the return of high-end gamblers and spenders to the city.
Japanese retail sales, which include Hawaii, were up by 12 percent to €194.2 million. On a currency-neutral basis, they rose by 5 percent, lifted by positive same-store sales that reached double-digit growth in the second quarter, thanks to strong local and tourist spending.
In the Americas, the group's retail sales were lifted by the stronger dollar and rose by 15 percent to €203.8 million. At constant currency rates, they declined by 5 percent due to lower tourist spending and a shift of local consumption to other destinations, including Europe.
In the Middle East, sales were up by 15 percent to €53.4 million, but they were off by 5 percent at constant currency rates due to lower tourist flows, especially from Russia.
As previously reported, Church's and Miu Miu were the group's brands that gave the best performances in the first half. Church's raised its sales by 19 percent to €25.8 million, with constant-currency growth of 9 percent, driven by double-digit growth in same-store sales in the second quarter. The management said that it is still working on a ready-to-wear collection for the footwear brand, even though this project has been delayed slightly.
Sales increased by 19 percent also for Miu Miu, reaching €257.9 million, with a gain of 6 percent at constant rates. The brand registered an improvement in organic growth from one quarter to the next. The management sees potential for this brand to reach an annual level of more than €700 million.
The Prada brand recorded a 5 percent increase in retail sales to €1,262 million thanks to positive exchange rates. At constant currency rates, the brand's sales were down by 5 percent in the first half due to weakness in Greater China. The brand's performance improved in the second quarter thanks to progress in the European and Japanese markets.
Car Shoe's sales were up in euros by one percent in the first half to €4.4 million, but revenues in local currencies were down by 6 percent due to the closure of three directly-operated stores in the second quarter.
Across the group, footwear performed much better than leathergoods in the first half of Prada's financial year. Its retail sales of leathergoods were up by 2 percent to €997.1 million, but down by 8 percent in local currencies. The company noted that it has positioned about 20 percent of Prada's line of handbags in a price range above €1,700 over the past 18 months. It has been introducing a string of new products since July.
The group's chief executive, Patrizio Bertelli, stressed his belief that the luxury market has not changed and that, aside from different generational tastes and needs, clients want exclusive products. “The problem isn't the price,” he said. “The issue is creating proper products that are attractive and that respond to the needs of a demanding market, because the market wants exclusive products from Prada.”
The group's sales of shoes increased at a strong 31 percent rate to €272.9 million in the first half, and they were up by 17 percent in local currencies, with double-digit growth for the shoes sold under both the Prada and Miu Miu labels. Bertelli bluntly explained the category's exceptional performance by the fact that shoes wear out more easily and need to be changed more often that other products. Creativity is certainly playing a role too: Observers praised a couple of very original shoe models in Miu Miu's spring 2016 collection presented during the recent Paris Fashion Week
Prada's gross margin went up to 72.7 percent in the first half from 71.8 percent a year earlier as production costs fell to 27.3 percent of sales from 28.2 percent thanks to efficiency measures along the supply chain and in manufacturing. The group is in-sourcing production that was previously carried out by third parties, while reinforcing quality controls. It also enforced a strict control of discretionary expenses and plans to reduce inventories of raw materials and finished products by €80 million. The company is confident that the gross margin will continue to improve during the year, but could not quantify the size of the improvement.
However, the operating margin after amortization (Ebit) dropped to 16.1 percent of sales in the half-year from 21.3 percent in the corresponding period of 2014 as advertising, selling and general and administration costs surged, largely due to the expansion of the retail network. On the other hand, the Ebit margin passed from 11 percent in the first three months of the year to 20 percent in the second quarter.
The gross operating margin before amortization (Ebitda) slipped to 24.1 percent in the first half from 28.1 percent a year earlier. Bertelli indicated that the group's ambition for the future is to lift the Ebitda margin to levels seen in 2013 and 2012, when it was just shy of 32 percent of sales.
Financial analysts expect sales in the full year ending in January 2016 to approach €3,790 million, up by nearly 7 percent year on year, with the Ebitda margin decreasing to around 25.0 percent from 26.9 percent and the Ebit margin narrowing to some 17.5 percent from 19.8 percent.
At the end of July, the group had 605 stores in operation. The door count was up sharply from 461 in January 2013, but the management confirmed that its three-year push to expand the retail network is coming to an end. From the next fiscal year, it plans to reduce the number of openings and focus on bolstering business at existing locations. Over the past 12 months, the group added 11 stores, mainly in new markets, thanks to 20 openings and nine closures. It relocated 15 shops and renovated eight others.
Capital expenditure were reduced to €176 million in the first half from €290 million a year earlier, when investments were bloated by the €62 million outlay for the purchase of new offices in Milan. Spending on the retail network was trimmed to €113 million from €174 million.