Prada is looking more expensive than usual. Shares in the Italian fashion house fell as much as eight per cent after costs rose faster than revenue in 2013. Weak sales from its Miu Miu brand added to the gloom. The selloff scuffs Prada's premium rating relative to rival luxury brands. But there may be further markdowns to come.
Even though investors caught a glimpse of Prada's 2013 revenue numbers in February, the earnings statement didn't look as pleasant close up. While group sales rose by some nine per cent annually, pre-tax profit was up by only 4.4 per cent as higher operating expenses ate into margins. The company said expanding its network of stores made distribution dearer. Advertising costs also rose as shops fought harder for sales.
With sales in Prada's home country of Italy and other European markets still sluggish, the company depends on Asian consumers for growth. Sales in Japan were up 24 per cent in constant currency terms, with shoppers buoyed by Abenomics. China, including Hong Kong and Macau, expanded by a less-buoyant 15 per cent. Though that's still robust, it's a far cry from Prada's 2011 sales growth rate in the region of 50 per cent. The government's crackdown on corruption has doubtless taken a toll, but Chinese consumers may also be becoming choosier. Any economic slowdown in China, which accounts for a quarter of total sales, could pinch Prada further.
Miu Miu's sales were also disappointing. The label conceived by designer Miuccia Prada generated 15 per cent of its parent company's sales last year. As a less established brand with fewer stores, Miu Miu offers a chance to boost sales. The company plans to roll out 70 new stores over the next two years. But sales last year were almost flat, while Ebitda contracted by 11 per cent.
Prada's share selloff has already taken some of the shine off its valuation. It's now trading at almost 20 times Barclays' revised 2015 earnings forecast. Luxury peers trade on a multiple of closer to 16, according to Eikon. Unless the group can rein in cost growth, further markdowns look likely.
