Prada confident in demand for luxury handbags from China

Tuesday 17 September 2013 19.02
Prada sales in China slowed from 35% to 20% in the first half compared to 2012 figures
Prada sales in China slowed from 35% to 20% in the first half compared to 2012 figures

Prada is seeing green shoots in Europe and feels confident about China, its biggest market, even though sales slowed in the first half.

The Hong Kong-listed Italian luxury goods group, whose first-half net profit fell short of expectations, said appetite for its colourful €1,500 leather handbags in China was showing no sign of abating.

Sales growth in Greater China, including Hong Kong, slowed to 20% in the first half from 35% a year ago.

"China is performing in a very good way and growth is still very high," Chief Financial Officer Donatello Galli said on a conference call on Prada's first-half results. He said investment plans in the country remained unchanged.

Chinese luxury spending has been hit by a government crackdown on gift-giving and conspicuous spending, affecting luxury goods, including upmarket watchmakers and designer handbag brands.

Greater China, including Hong Kong, makes up 21% of Prada's revenue.

In Italy, which accounts for 18% of total sales, Prada said the sales decline at its shops had slowed down but it was too early to say its home market had turned a corner.

"In terms of domestic demand in Italy I think it is too early to say if we reached a bottom," Galli said.

For Europe as a whole, Galli said the brand had seen an increase in tourist spending and the economy was showing signs of a very gradual recovery.

Galli said summer trading was good and sales growth in August was actually better in like-for-like terms than during the second quarter. But he noted that demand in the first 10 days of September proved softer in both Asia and Europe and suggested events in Syria and elsewhere in the Middle East were affecting tourist travel.

Prada, which had 491 directly operated stores at end-July, plans to open around 80 shops in total this year and next, and enter new markets such as Kazakhstan after Morocco and Qatar.

The Prada brand, which generates more than 83% of group turnover, had a 12% rise in second quarter sales, while revenues from smaller brand Miu Miu were up 3%.

An improved product mix together with solid growth in Asia and fewer mark-downs helped Prada lift its operating margin to 26.5% from 25.5% in the first half.

The company's 15% second-quarter net sales growth at constant exchange rates puts it on par with French luxury peer Hermes which reported a 16% jump in its own second quarter sales.

Prada reported a near 8% increase in net profit for the six months ended July. The €308m profit slightly lagged a €321.3m average analyst forecast.

Its shares have risen 8% so far this year, underperforming the luxury sector average which gained 18%, partly because the stock's relatively high valuation.

Prada, at 23.6 times forward earnings, is more expensive than Burberry and LVMH but earnings growth expectations are higher: on average, analysts expect Prada's earnings to grow a fifth next year, or about 50% faster than LVMH or Burberry.

Keywords: prada