November 19, 2021

Breakingviews: Prada’s new look merits fashion league promotion

by Breakingviews.

Prada is en route to join the A-listers on the other side of the luxury sector’s velvet rope. After years of drift, the $18 billion Italian brand has got a grip on its retail network, clamped down on discounting and spruced up its image. That lays the foundations for a jump in sales and profitability. For investors, promotion to the fashion’s premier league is well worth having.

Thursday’s shareholder day was only the second such event since the group, controlled by designer Miuccia Prada and her husband Patrizio Bertelli, listed in Hong Kong a decade ago. To mark the occasion, the maker of $2,500 Galleria bags pledged to increase revenue to 4.5 billion euros “in the medium term”, 40% above 2019 levels, and double its operating profit margin to 20%.

In plain terms, the financial fashion parade is another sign of Prada speeding up the costume change it initiated in 2017 to arrest a slide in sales. Since then, the group has reduced ties with wholesalers to focus on its own more profitable stores. Sales directly to well-heeled customers represented nearly 90% of revenue last year. That ratio has scope to rise further. And its swanky outlets have all but eliminated discounted sales, boosting margins.

Bringing in 33-year-old Bertelli scion Lorenzo as chief executive-in-waiting also shows Prada is serious about boosting its appeal to younger customers, who worry more about sustainability and prefer shopping online. Digital revenue, negligible before the pandemic, will represent about 7% of sales this year. That could double over the next three to four years.

If anything, Prada’s new revenue goals are conservative, at just 12% above the 4 billion euros already pencilled in by analysts for 2023, according to Refinitiv. The new operating profit target is below the 27% of Prada’s heyday, and lags the 28% and 25% numbers flaunted respectively by bling conglomerates Kering and LVMH. However, it has the benefit of being achievable and yet still sets the group apart from luxury laggards like Salvatore Ferragamo, which has a roughly 10% operating margin, or Tod’s, which may end this year in the red.

Prada’s improved look merits promotion to high fashion’s top flight.

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