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Prada's Turnaround Is Under Pressure

Prada is on a mission to regain its footing in the high-stakes world of luxury fashion. Its latest set of results show that won’t be easy.
Source: Getty Images
By
  • Sarah Kent
BoF PROFESSIONAL

LONDON, United Kingdom — Prada is on a mission to regain its footing in the high-stakes world of luxury fashion. Its latest set of results show that won't be easy.

The company reported revenue of €1.6 billion for the first half of the year, up 2 percent. Sales were flat once currency fluctuations are factored out. While the company's net profit jumped nearly 56 percent thanks to a one-time €77 million tax exemption, earnings before interest and tax — which strip out the exemption — fell 13 percent. The tax break is the result of a years-long process to benefit from Italy's Patent Box regime, which provides significant tax reductions on profits derived from companies' intellectual property between 2015 and 2019.

The company's underlying results pale in comparison to Prada's rivals, many of which reported financial results last week. At Kering, comparable sales at Gucci and Saint Laurent both grew by around 16 percent in the first half, while LVMH's fashion and leather goods division, which includes Louis Vuitton and Dior, grew revenue by 18 percent.

Prada’s uneven results reflect the strain of a turnaround plan aimed at reversing years of sliding sales and shrinking margins. Earlier this year, the company said it plans to stop seasonal markdowns at its stores, and is in the process of reviewing its wholesale partners. Both steps are meant to boost the brand's control over pricing and how its products are presented to customers.

The initiatives come on the back of efforts to mend past merchandising mistakes and enter into the digital age. To get back to growth, the company is focusing on e-commerce, modernising its retail outlets and focusing on crowd-pleasers with the relaunch of its nylon handbags and a growing emphasis on sustainability.

Progress remains lumpy, revealing underlying challenges to the company's turnaround plan.

Those efforts have started to pay off: last year, the company reported revenue grew 6 percent at constant exchange rates, the first increase in four years. However, profits fell nearly 18 percent.

If its latest set of results are anything to go by, progress remains lumpy, revealing underlying challenges to the company’s turnaround plan.

“The strategic review of wholesale and ending of seasonal markdowns are necessary steps to build the future of the Group, despite the short-term impact,” Prada said in its results presentation.

The decision to move away from markdowns should pay off in the long term, but for now it’s dampening organic growth prospects. At constant currency rates, revenues from Prada’s retail network fell 3 percent in the first half. Meanwhile, continued growth from wholesale is expected to come under pressure from the company’s decision to rationalise its partnership base.

“Reduced markdowns in stores are affecting top-line organic growth negatively and going forward we could see the impact of reducing wholesale,” said Luca Solca, head of luxury goods research at Bernstein. “To cut a long story short, this is a mixed set of results.”

Others had a more positive spin on the company's long-term prospects, with Bank of America Merill Lynch calling Prada "the most promising turnaround story in the sector" on signs of accelerating full-price sales.

Elsewhere, the company is not immune to global economic headwinds. Sales in the all-important Asia-Pacific market fell 4 percent as unrest in Hong Kong and unfavourable currency fluctuations in the popular shopping destination offset better trends in mainland China.

As Solca wrote in BoF last month, "Prada remains a step (or two) behind its peers." Now, with dark clouds gathering on the horizon of the global economy, Prada's opportunity to execute on its turnaround strategy may be limited.

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