Despite consistency issues, Prada is on track
Prada (“Narrow Moat”) is a family holding company operating in the luxury sector around the brands Prada, Miu Miu, Church’s and Car Shoe.
The company achieves a turnover of more than 3 billion euros, of which approximately 90% is under the Prada brand.
Leather goods account for 50% of turnover, ready-made clothing for 27%, shoes for 19%, and licenses (mainly glasses and perfumes) for 2%.
Regionally, Asia is the largest region with 38% of sales, followed by Europe (29%), Americas 19% and Japan 9%.
An iconic brand
Prada is one of the most well-known and loved luxury brands and has earned a reputation in art.
He has developed a global retail network of more than 600 stores for Prada and Miu Miu, most of them in key travel destinations.
Although currently weakened by revenue (return on investment currently at 7.2% compared to 13.6% in 2013), distribution control has strengthened the company’s brand competitive footing, enhanced brand awareness, prevented excessive discounting, and maintained strong bargaining power. with wholesalers.
As retail infrastructure is built and new demand is generated from existing stores, operating costs must be optimized.
Recent management initiatives such as streamlining wholesale channels, reducing discounting, increasing digital and marketing investments, as well as increasing vertical integration and streamlining production should strengthen the brand and strengthen its competitive advantage.
The impact of these moves, along with improved brand momentum, is already translating into improved sales trends and profitability in 2021 and 2022, in our view.
We believe the company will grow its revenue by 5%-6% over the next 10 years, driven by the strength of its brand and the overall expansion of the luxury industry, with operating margins expanding into the 20s. growth in global market revenues) as well as operating leverage as store density improves.
The fair value estimate has not changed
We maintain Prada’s fair value at HKD 38.
Over the long term, we expect growth to come from a growing number of middle-class consumers worldwide, as well as existing consumers as their wealth increases.
We believe Prada’s retail space provides a sufficient platform for growth, and we expect same-store sales to increase and store occupancy to improve as demand for its products increases.
Leather goods and apparel brands experience ups and downs, and in our case, we expect demand for Prada products to grow over the next two to three years, which is consistent with our medium competitive anchor rating (“Dar Moat”).
The recovery is expected to be fueled by the introduction of new products (which help attract existing customers), product improvements, and an increased focus on online marketing and distribution.
We expect average revenue growth of 6% to 7% over the next 10 years, accompanied by an operating margin improvement of 20% from the mid-10s average over the past 10 years.
Given Prada’s greater exposure to fashion-oriented product categories (less carryover) and lower sales density, this level is 20% to 30% (or more) of some luxury brands such as Gucci, Chanel or Louis Vuitton. will remain under.
Short-term profitability improvements must be offset by the marketing investments and online infrastructure investments needed to relaunch the brand.
We expect short-term investment in online platforms to grow at an average capex of 6% over the next five years, down from 10% in the previous year’s retail investment phase, but still above the 4% average. 5% for peers.
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