MILAN — Prada SpA is adopting a Darwinian strategy, rushing to change to meet the industry’s altering environment.
Those changes include a continuing cutback in the number of wholesale accounts, a sharp slowdown in store openings over the next three years and the boosting of in-house production to gain greater control over quality.
“The next challenges will regard our ability to adapt to the rapidly evolving market,” said chief executive officer Patrizio Bertelli, pointing to the strength of the group’s brands and its “innovative capacity” even as he admitted 2014 was “a year of transition” on Prada’s “journey of growth.”
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That growth decidedly stalled last year. The company on Monday reported a 28.2 percent dive in net profits in the 12 months ended Jan. 31 to 450.7 million euros, or $590.4 million, from 627.7 million euros, or $834.8 million, in the previous year, due partly to a steep decline in sales in the Far East.
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Operating profit dropped 25.3 percent to 701.5 million euros, or $919 million, from 939.2 million euros, or $1.25 billion. Earnings before interest, taxes, depreciation and amortization totaled 954.2 million euros, or $1.25 billion.
As reported in February, revenues slipped 1 percent to 3.55 billion euros, or $4.65 billion, from 3.29 billion euros, or $4.37 billion. Growth came from Japan, the Americas and the Middle East.
All figures have been converted at average exchange rates for the periods in question.
Prada’s shares in Hong Kong dipped 1 percent on Monday, to close at 49.85 Hong Kong dollars, or $6.42 at current exchange.
Bertelli, who did not participate in a conference call with analysts and media during an investors’ day in London on Monday, followed by a visit to the Church’s factory in Northampton, insisted that, despite the poor performance, Prada “preferred to take a medium/long-term view with the continuation of its investment program,” confirming its plans to fuel production and research, and to optimize its retail network.
Prada chairman Carlo Mazzi underscored that the group is working on “adapt[ing its] organization to the new environment and the new complexity, not only in terms of size but considering different markets and the speed of the world.”
Prada, he said, has been adapting its products in terms of mix and focusing on investing in its retail channel. “Now we are working mainly in terms of organization,” he noted.
But the chairman seemed to indicate that the turnaround won’t be a fast one. Mazzi said that “the external environment is still uncertain for the year, with a weaker euro supporting sales, but Macau and Hong Kong remain unsettled.”
He nonetheless touted Prada as situated “firmly on top” of the luxury market, which is still a leading business area. “Luxury is normal for people. Luxury is loved by rich people, by everybody, because beauty is something for the spirit,” Mazzi mused.
He conceded that competition has increased and that customers are more sophisticated. “We need the ability to be responsive in the short term and invest in the long term.”
Mazzi continued: “What is the action plan? We have to renew our strong focus on organic growth, to continue to increase store productivity” and build a “new, stronger organization.” The company is earmarking an “industrial investment to protect a competitive edge, to ensure the best quality to the customer” as it increases its control over outsourcing, eyeing “maybe in the future, a lower percentage of outsourcing,” he said.
The company is boosting its in-house production in a factory in Tuscany and chief financial officer Donatello Galli pointed to the recent acquisition of a historical tannery in France. “We have to react to a market which is more demanding with increased production capability,” he said.
In line with its strategy to focus more on own-retail, the group’s wholesale channel posted a 3.4 percent decrease in sales last year. The contraction was mainly seen in Europe and the U.S., while franchised, duty-free stores saw an increase of Chinese customers in Asia Pacific. “We are roughly where we should be, cutting off accounts we shouldn’t have,” Galli said.
As of Jan. 31, the company had 594 directly operated stores, and Prada’s retail channel totaled sales of 2.98 billion euros, or $3.9 billion, in line with the previous year. The company opened 54 stores in the last 12 months, including 32 Prada, 19 Miu Miu and three Church’s units but it is slowing down this rate to 30 units in 2015, said Galli. “There are new market opportunities but we are focused on our existing stores, and, in the two years going forward, we will open no more than five or six stores per year. The actual network can be considered completed.
“We have to improve like-for-like sales and return to positive,” Galli said, referring to a high single-digit decline last year. He reiterated that “wholesale is not the best channel for luxury,” trumpeting the rationalization of the group’s accounts. Retail marketing activities, attracting local customers and interacting with them with additional services were identified as key to improving same-store sales.
The Asia Pacific region generated sales of 1.25 billion euros, or $1.63 billion, down 3.1 percent and representing 35.7 percent of the total. Greater China benefitted from the Chinese local market, but was down 6.3 percent to 774.1 million euros, or $1.01 billion.
Sales in Europe were down 4.9 percent to 739.1 million euros or $968 million. Italy was in line with the previous year with revenues of 553.4 million euros, or $725 million.
The U.S. grew 0.9 percent to 492.2 million euros, or $644.7 million. Japan was up 7.9 percent to 367.6 million euros, or $481.5 million, and the Middle East was up 13.6 percent to 103.5 million euros, or $135.6 million.
The Far East is “a gray spot” now, said Galli, referring primarily to Hong Kong and Macau. The company opened new markets with stores in Copenhagen, Vienna, Johannesburg and Panama, for example.
Sales of the Prada brand totaled 2.9 billion euros, or $3.8 billion, accounting for 83 percent of total revenues and were down 1.7 percent, although the men’s division grew globally.
Miu Miu generated sales of 527 million euros, or $690.3 million, up 1.5 percent, lagging behind only in Europe. Miu Miu is enjoying the tailwind of recent openings and investments in brand awareness, and saw an improvement in Italy in the last few weeks of the year, said Galli. Asked by an analyst whether the 2016 target of reaching 800 million euros, or $904 million at current exchange, for Miu Miu was still viable, Galli responded that “it doesn’t make sense if less. It’s a matter of math, not strategies.”
Church’s grew 7.9 percent to 74 million euros, or $97 million. Church’s was the best-performing brand in the last quarter, though “not the biggest,” but Galli said there “are opportunities, we are doing the same as with Prada but on a lesser scale.”
Affected by the slump in the wholesale channel, Car Shoe saw an 11.1 percent drop in sales, which fell to 11.9 million euros, or $15.6 million.
The footwear category rose 8.4 percent to 644.7 million euros, or $844.5 million, accounting for 18.3 percent of the total. Clothing totaled 594.8 million euros, or $779.2 million, representing 16.9 percent of sales, up 2.3 percent compared with the previous year. Leather goods were down 4.9 percent to 2.21 billion euros, or $2.9 billion.
Galli said analysts shouldn’t focus on one particular category. “In leather goods, there are more competitors in a market that is not growing. We cannot kill other brands, they are there,” he said.
Communication and marketing director Stefano Cantino said the company is “not frantically changing products,” underscoring that “innovation is more relevant. We are committed to preserve the edge in a competitive luxury market, and preserve our craftsmanship.”
Communication will remain one of Prada’s strongest drivers to support stores and sales, he added, as the company has been actively engaging customers in stores, working on social media, optimizing merchandising, and leveraging iconic products by offering new versions. Cantino also pointed to new options of entry price bags retailing for between 700 and 800 euros, or between $792 and $905 at current exchange rate, and a limited-edition range retailing at between 1,000 and 1,200 euros, or $1,132 and $1,358.
Galli said he was “confident” the company will “stabilize margins and go back to increasing margins in the next months.” Asked about pricing, following Chanel’s decision to realign its prices globally, Galli said the company is “carefully evaluating all markets. We will make a decision after Easter, but we feel it has to be global. We don’t feel the need for increases in Europe,” pointing at possible reductions in Asia.