Admitting some managerial shortcomings, the Prada Group said it is planning to reinforce its senior management by appointing a general manager recruited from outside the Prada family, which controls the company through Prada Holding. The management is currently in the hands of two joint chief executives: Miuccia Prada, 66, who oversees design, and her husband Patrizio Bertelli, 69.
In reporting its results for the nine months ended on Oct. 31, Prada also said that the fast-growing expansion of its store network, which weighed down on its operating results, is now over and that the company will pursue a price adjustment program in 2016 to narrow further the existing price gaps between some of the markets it serves.
As the prices charged by the group in mainland China are 35 percent higher than in Europe, Bertelli told financial analysts that it will raise prices in Europe to reduce the differential to 15 percent. Similar adjustments will be made elsewhere. “If we have buyers in Hong Kong or in China, we don't want them to go to Korea to buy our products at a lower price,”he said. He added that the group is engaging in a “transparent marketing policy”that will be applied worldwide.
Like other fashion groups, Prada referred to a global trend toward price harmonization, noting that it was due to information circulating about the subject more widely than before, driven by the internet and with more people traveling.
The company can also rely on the fact that the expansion of its global retail network is almost complete. At the end of October, the group had 612 stores compared with 549 at the end of January. The company opened 29 stores and closed 11 in the last nine months. Prada plans to open only ten new stores in 2016, while raising the prices it charges in Europe. Despite its ongoing focus on cost containment, Prada ruled out a hard-nose store closure policy for next year.
The group is introducing Wi-Fi connections in 180 stores in January, with the service due to be rolled out in other stores during the first half. The company aims to boost direct customer relationship management and better inform clients and staff about product availability. But Prada has been reluctant to develop e-commerce, which is estimated to represent less than 1 percent of its revenues, although online sales of luxury goods have grown at more than twice the pace of the market.
According to the latest figures, Prada's net revenues rose by 1.2 percent to €2,582.5 million in the nine months to Oct. 31, with retail sales up by 3.8 percent to €2,253.5 million and wholesale revenues down by 15.9 percent to €295.5 million. Royalties from licenses for eyewear and fragrances surged by 16.2 percent to €33.5 million, thanks to the launch of the first Miu Miu perfume in July.
Sales of footwear were up by 24 percent to €399.7 million across the group, and they were up by 13 percent in local currencies, with Church's outperforming the other brands of the group. After six consecutive quarters of double-digit organic growth, footwear sales were up in the third quarter of 2015 by 11 percent in euros and by 6 percent on a currency-neutral basis.
Other categories and other brands performed less well. At constant currency rates, the group's total retail sales fell by 5 percent and wholesale revenues decreased by 21 percent. The decline at wholesale was influenced by the group's ongoing policy of downsizing the business to fend out possible parallel imports and a decline in the South Korean duty-free channel due to the outbreak of MERS (Middle East respiratory syndrome, coronavirus) in the country. Prada described wholesale as a “residual”part of its business, estimating that it may have reached its right size. It expects wholesale revenues to be flat to slightly lower next year.
Except in Europe and Japan, where many Chinese tourists did their shopping, the group's retail business continued to be in the red in terms of same-store sales during the nine-month period. In the third quarter alone, global comparable store sales were down by a high single-digit rate.
The group's poor performance pushed the stock price down and prompted analysts to question the company's management. The Bloomberg news agency cited a research note by an analyst with Bocom International, Phoebe Wong, saying that the group's third-quarter results considerably under-performed its peers and “signify Prada's structural problems are likely to be more intense than expected.?Ç¥
The company rejected the ideas of de-listing from the Hong Kong stock exchange to go private or of introducing a chief operating officer for each single brand. It declared itself, however, open to reinforcing its management structure by possibly hiring a general manager in charge of manufacturing for the whole group.
In an interview with the daily Il Corriere della Sera, Prada's chairman, Carlo Mazzi, expanded on the matter saying that the company is aware that it needs a different structure from that of a family-run corporation. “Our goal in 2016 is to engage in a thorough review of the organization,”he told the newspaper.
Analysts are evidently worried by the fact that the decline in the group's retail sales is becoming more widespread. In Europe, retail sales were still up in the first nine months by 9 percent to €815.9million at current currency rates, and by 8 percent at constant exchange rates, with Italy outperforming. But, growth in the region slowed down significantly in the third quarter, rising by only 2 percent both on a reported and currency-neutral basis. Europe, like other markets, suffered from a worsening economic environment that affected tourist flows.
European sales are expected to be dented in the fourth quarter by the terrorist attacks that occurred in Paris on Nov. 13. The company cited data from the Paris Chamber of Commerce indicating that about 30 percent of hotel bookings and some 20 percent of flight reservations for the French capital had been cancelled following the shootings. It noted that London and Milan also suffered from trip cancellations. The group added that Far Eastern tourists are now favoring Korea or Japan.
Meanwhile, the Prada Group's sales in the Asia-Pacific region fell by 5 percent to €784.4 million in the nine months. In local currencies, the decline reached 18 percent. During the third quarter, the downward sales trend accelerated to rates of 14 percent in euros and 20 percent at constant currency rates, due to the volatility of financial markets that negatively impacted spending in Greater China.
In Greater China, the group's sales were down by a reported 9 percent to €516.4 million in the nine months, with a decrease of 24 percent at constant exchange rates. Third-quarter sales in Greater China fell by 17 percent and 26 percent, respectively.
Japanese retail sales, which include Hawaii, were up by 10 percent to €283.8 million in the nine months. On a currency-neutral basis, sales were up by 5 percent, but the growth slowed down in the third quarter due to a lower performance in Hawaii.
In the Americas, retail sales rose by 9 percent to €293.7 million in the nine months, thanks to the strong dollar. But at constant currency rates, they declined by 8 percent due to drop in tourist spending in the U.S. and a shift of local consumption to other destinations, including Europe. In the third quarter, sales in the region fell by 4 percent in euros and by 13 percent in local currencies. However, organic sales in Canada, Brazil and Mexico were positive in the nine months and improved significantly in the latest quarter.
In the Middle East, the group's sales were up by 10 percent to €73.4 million in the nine months, but they were off by 8 percent at constant currency rates due to lower tourist flows,
Miu Miu and Church's performed better than the Prada brand, which recorded a 2 percent increase in retail sales to €1,836.5 million in the first nine months of 2015, thanks to positive exchange rates. At constant currency rates, its sales were down by 6 percent due to weakness in Asia-Pacific and in the U.S. The brand's performance worsened in the third quarter declining by 5 percent at current exchange rates and by 9 percent at constant rates.
The Miu Miu brand raised its sales by 12 percent at current exchange rates to €368.3 million in the nine months, rising by 2 percent at constant rates. In the third quarter, however, the brand's sales went down by 2 percent in euros and by 6 percent in local currencies.
Church's increased its sales by 18 percent to €39.3 million between February and October, with constant-currency sales up by 9 percent. The brand's sales remained resilient in the third quarter, rising by 16 percent on a reported basis and by 9 percent at constant currencies. The brand's same-store sales were up by double-digit rates in the last two quarters.
In the nine-month period, retail sales of leathergoods were down by 1 percent to €1,426.2 million for the group as a whole, in contrast with the positive trend in footwear, and they dropped by 10 percent at constant currency rates. In the third quarter, leathergoods were down by 9 percent in euros and by 13 percent in local currencies.
The group's gross margin rose to 73.1 percent in the nine months from 72.0 percent a year earlier as production costs fell to 26.9 percent of sales from 28.0 percent, thanks largely to more efficient manufacturing processes.
However, the operating margin (Ebit) dropped to 14.5 percent from 19.5 percent as advertising, selling and general and administration costs surged largely due to the expansion of the retail network. The attributable net profit fell by 26.4 percent to €235.1 million.
Capital expenditures slipped to €235 million from €353 million a year earlier, when investments were bloated by the €62 million outlay for the purchase of new offices in Milan. The expenses for the retail network were reduced to €144 million from €217 million.
Prada said that it is “a little bit more optimistic”about its performance in 2016 and remained confident about its ability of fostering organic growth in the long term.