Prada confident on China, sees recovery in Europe

Reuters

HONG KONG/MILAN Sept 17 (Reuters) - Prada isseeing green shoots in Europe and feels confident about China,its biggest market, even though sales slowed in the first half,the luxury Italian fashion house said on Tuesday.

The Hong Kong-listed group, whose first-half net profit fellshort of expectations, said appetite for its colourful1,500-euro leather handbags in China, particularly insecond-tier cities where it was opening shops, was showing nosign of abating.

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

Sales growth in Greater China, including Hong Kong, slowedto 20 percent in the first half from 35 percent a year ago.

Chinese luxury spending has been hit by a governmentcrackdown on gift-giving and conspicuous spending, affectingluxury goods, including upmarket watchmakers and designerhandbag brands.

Greater China, including Hong Kong, makes up 21 percent ofPrada's revenue.

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

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

For Europe as a whole, Galli said the brand had seen anincrease in tourist spending and the economy was showing signsof a very gradual recovery.

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

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

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

An improved product mix together with solid growth in Asiaand fewer mark-downs helped Prada lift its operating margin to26.5 percent from 25.5 percent in the first half.

The company's 15 percent second-quarter net sales growth atconstant exchange rates puts it on par with French luxury peerHermes which reported a 16 percent jump in its ownsecond quarter sales.

Prada reported a near 8 percent increase in net profit forthe six months ended July. The 308 million euros profit slightlylagged a 321.3 million euros average forecast by five analystspolled by Thomson Reuters.

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

Prada, at 23.6 times forward earnings, is more expensivethan Burberry and LVMH but earnings growth expectationsare higher: on average, analysts expect Prada's earnings to growa fifth next year, or about 50 percent faster than LVMH orBurberry.

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