However, as the outlook for high-end products dims, the company needs to redouble its efforts to continue its trajectory and focus on improving its profitability.
Prada SpA burst onto the luxury scene in the mid-1980s, when Miuccia Prada began designing for her family’s accessories house and the company built on the success of her backpacks in nylon. It focused on aggressive expansion, particularly in Asia, even going so far as to list itself in Hong Kong in 2011. But soon after, it was hit by a Chinese crackdown on conspicuous consumption. He was also slow to believe that shoppers would buy luxury goods over the internet.
The company posted five years of declining annual sales through 2018, and even then its tepid growth led to speculation that the family, which controls 80% of the shares, could be forced to sell LVMH Moet Hennessy Louis Vuitton. SE or Kering.
Curiously, Prada’s resurgence was partly fueled by the zeitgeist for all of the 90s when the fashion house was at its peak. Not only did it quickly spark interest in its ’90s nylon, but it gave the flagship a lasting makeover.
Indeed, his turnaround is due to more than luck. It has invested heavily – more than 200 million euros ($194.9 million) last year – in its digital capabilities, store network and supply chain.
He also finally got ahead of family succession issues. In a surprise move five years ago, Lorenzo Bertelli, eldest son of co-chief executives Miuccia Prada and Patrizio Bertelli, joined the company, emphasizing digital and sustainability. The 34-year-old, who is next to become CEO, led the Re-Nylon collection, made from recycled ocean plastic, fishing nets and waste from the textile industry. The nylon bag – a 90s icon – is reborn with fully sustainable fabric, helping propel Prada to a new, younger audience. It ranges from £1,000 ($1,118) to £1,500.
And in 2020, Miuccia Prada tapped Raf Simons, the much-loved Belgian designer, as co-creative director. The duo has presented collections that have become more and more popular since the beginning of their collaboration.
It’s all paying off: Prada was the second-most fashionable brand after Gucci in the third quarter, its highest ranking ever in the Lyst Index, which measures searches on and off the Lyst fashion platform, as well as than social media mentions. Miu Miu ballet flats were the most requested product.
Prada does not provide quarterly updates, but it is likely to have followed rival LVMH in achieving strong sales in Europe, with American tourists making the most of their hefty dollar.
Yet it must now continue its transformation amid Chinese lockdowns and runaway inflation in the United States and Europe. That means making sure the brand can hold its own against blockbuster names like Louis Vuitton that shoppers tend to gravitate towards in uncertain times.
Prada’s plan to continue investing 200 to 250 million euros per year is sound. But it also needs to bolster profitability, which still lags its rivals. The company aims to grow its underlying operating margin from 17.4% in the first half to at least 20% in the medium term.
The key to that will be translating her newfound popularity into lucrative handbag sales. Industry-wide, bestselling bags have historically generated gross margins of over 80%. Yet right now Prada has more exposure to fashion and shoes, and less to handbags, compared to LVMH for example, according to Bernstein analysts. Leather goods accounted for around 51% of Prada group sales in 2021, leaving it plenty of room for expansion.
Prada is also underinvested in the United States, with only 22% of sales coming from the Americas in the first half. On the other hand, LVMH achieved 27% of its sales in the United States over the same period.
Offering more It bags and bringing them closer to the price of Chanel and Hermès could help Prada achieve its ambitions even in a downturn. It is the super-rich who continue to spend after all.
Prada shares have outperformed the MSCI World Textiles, Apparel & Luxury Goods Index this year. Investors clearly believe that the company can complete its turnaround and subsequently deliver strong performance in terms of sales and earnings.
There are indeed reasons for optimism. Gucci isn’t firing on all cylinders right now. It generally does well when Prada is in trouble, and vice versa. Meanwhile, a secondary listing in Milan could broaden Prada’s pool of potential investors.
But fashion is notoriously capricious. In the music charts, streaming means that hits can hang around for months or even years. This is not the case when it comes to style.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.
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