Prada feels the pain of a luxury slowdown in Asia

Tuesday, 10 June 2014
ANALYSIS_ Net income in the three months to April fell 24 per cent to 105.3 million euros or 1.11 billion Hong Kong dollars, badly affected by euro's strength against Asian currencies – mainly the Japanese yen. Net income fell far behind market expectations of 129.7 million euros. Prada cited a slowdown in Korea, Hong Kong and Singapore as much of the reason for its weaker-than-expected first-quarter sales. The fact that the business in Europe was hit by a reduction in tourist footfall and the strength of the euro did not help either.

Sales in the Asia-Pacific region shrank by 2.6 percent, which Prada attributed to a slowdown in South Korea, Hong Kong and Singapore. "Management is closely monitoring the development of the markets, as far as geographies and products are concerned, in order to update, if appropriate, the guidance on the 2014 results," the Italian fashion house said in a note.

In April, Prada said it expected sales to grow 9 percent this year, with an operating profit margin in line with 2013 and like-for-like sales growth of at least 3 percent. Inquired about a potential update of their outlook, Chief Financial Officer Donatello Galli said in a conference call that they “do not have enough visibility at the moment to give a more precise prediction for the end of the year; it would be better to wait a bit longer."

Weak Q1 income costs Prada 7 percent of its share value

The gloomy news cost Prada 7 percent of its share value on Hong Kong Stock Market by the close of last week. As highlighted by market experts, the stock slumped to its lowest in nearly two years on news its European sales dropped 4.1 percent. Net income fell 24 percent to 105.3 million euros.

Prada’s performance in the three months to April 30 had been hit by unfavourable exchange rates, declining wholesale deliveries and a tough comparison with the previous year. Net sales dropped 0.6 percent to 777.7 million, falling short of analysts forecasts due to a slowdown in Asia and Europe.

As highlighted by many analysts closely monitoring the stock, Prada might have just signalled a possible cut to full-year guidance after first-quarter sales fell in its main European and Asian markets.

Weighting this possibility, Mario Ortelli from Bernstein pointed out that the group could make a cut, partly depending on external factors. "(Prada) left open the opportunity to revise the guidance, most likely down, during the year, partly depending on foreign exchange," he said in a note to investors.

In this vein, Steve Chow, an analyst at Sunwah Kingsway Research, noted that “The market was expecting slower growth in sales, not an actual decline." "The negative (revenue) growth triggered concern over whether the brand has lost its appeal, especially when other luxury brands are doing well despite a relatively weak luxury market," he added.

Europe “was mainly penalised by the decline in the tourist flows resulting from the further strengthening of the euro currency,” Chief Executive Officer Patrizio Bertelli argued in a statement.

“The biggest disappointment came in Europe and Asia ex-Japan,” Karim Salamatian and Rebecca Kwee, analysts at Credit Suisse wrote in a research note. “The sequential decline in Prada’s constant foreign exchange sales growth has worsened over the past four quarters to a level where growth is now considerably below the global luxury sector,” they said.

Looking ahead, “the management will be focused on the improvement of the shop performances both with strict control on costs and actions to sustain sales,” advanced Bertelli.

Following the quarterly business update, Credit Suisse lowered Prada’s price target to 59 Hong Kong dollars from its previous 63 Hong Kong dollars. The broker holds a ‘neutral’ recommendation on the stock.

Angela González Rodríguez

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