MILAN, Italy — After the excitement of LVMH Moet Hennessy Louis Vuitton SE's forecast-busting performance, luxury has come down to earth with a bump.
Prada SpA on Wednesday unveiled its lowest full-year profit since its 2011 initial public offering.
Prada full-year net income: €278.3 million ($295.8 million).
To some extent, the slump reflects 2016's broader industry slowdown. The Milan-based group was hit particularly hard because of its large exposure to China. Some aggressive store expansion early on, as well as slowness in developing a digital offering and a bloated cost base didn't help either.
Prada is addressing its store issue, planning to hold its number of outlets steady, outside of the occasional pop-up to create buzz.
The company is also making progress on digital, and has significantly cut costs: Operating expenses fell 10 percent in the year through January. With lower capital expenditure, that helped operating cash flow increase 72 percent to €632 million ($673 million).
But perhaps most significantly, Prada's presence in China (it's one of the luxury brands most exposed to the nation) is now a positive. Chief Financial Officer Alessandra Cozzani said there had been a "big rebound," including in Hong Kong and Macau. This, together with new products, helped sales at the Prada and Miu Miu brands move in the right direction in the second half.
Investors are betting on the turnaround gathering pace. The company's Hong Kong-traded shares are up 32 percent over the past 12 months and trade on a forward price earnings ratio of 29 times. To some extent, that reflects the collapse in Prada's earnings. Even so, the premium to both LVMH and the Bloomberg Intelligence luxury peer group looks stretched.
Sales rose in January for the first time in more than a year, however on Wednesday, Cozzani would only say that the trend for same-store sales in February and March was "positive enough".
Prada is doing all the right things to try to address its underperformance. But to justify its lofty valuation, it must be more emphatic that this is delivering actual sales growth. A full-blown recovery isn't in the tote bag just yet.
The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
By Andrea Felsted; editor: Katrina Nicholas.