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Prada’s Getting More of its Business from Asia

Full-year revenues for Prada S.p.A. fell by 24 percent to 2.42 billion euros ($2.9 billion), but the Italian luxury giant was able to bounce back in the second half after starting the Covid-impacted year with a 40 percent sales plunge in the first six months. In fact, the rebound was in full effect by December, with the company’s monthly retail sales topping 2019 levels, despite a second wave of lockdowns across Europe.

The recovery in retail sales, which account for nearly 90 percent of Prada’s total, was driven in the second half by Mainland China (52 percent growth), Taiwan (61 percent growth), Korea (22 percent growth), with support from the Americas, which saw a 4 percent sales uptick.

In a Nutshell: Overall, the Prada Group operated in the 12 months of 2020 with an average of 18 percent of stores closed (27 percent in the first half and 9 percent in the second), which peaked at 70 percent in April 2020. As of Dec. 31, 2020, 22 percent of the stores were still closed due to the pandemic.

In 2020, Prada Group permanently closed eight of its 160 Miu Miu stores, and opened its own franchise Prada location. Across its Prada, Miu Miu, Church’s, Car Shoe and other brands, the luxury group has 633 owned stores and 26 franchise locations.

Prada attributes its resilience to its strict controls over its production processes, which is powered by 20 facilities in its home country of Italy, along with full collaboration with government authorities and the flexibility of its craft workers, which limited the production shutdown to just five weeks. This ensured some supply continuity to the stores, the company said.

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The ability to readily reallocate finished products within the retail network supported the assortment in stores that stayed open and the growth of the direct e-commerce channel, thus preventing excessive inventories.

Total inventories came out to 666.2 million euros ($794.1 million), a 6.5 percent decrease compared to the 712.6 million euros ($849.4 million) the prior year. Gross margin increased slightly from 71.9 percent in 2019 to 72 percent in 2020. The favorable sales mix in terms of channel and geographical area enabled Prada to offset the dilution of the initial months of the year caused by reduced economies of scale in the manufacturing division.

The company leveraged consumers’ changing shopping habits by focusing on building a dynamic omnichannel experience, particularly with the rollout of nearly 80 popup and special in-store shops in 2020, with around 50 deployed in the second half. These experiences were fully integrated with Prada’s digital campaigns.

Net operating cash flows at Prada now total 262.1 million euro ($311.8 million). The group’s net financial deficit improved from 406 million euros ($483 million)  as of Dec. 31, 2019 to 311 million euros ($370 million) as of Dec. 31, 2020.

Prada would not give a specific outlook on 2021 due to the uncertain environment, but noted that since the fundamentals of the luxury sector remain strong, it is well positioned to capture long-term growth. The company said in a statement that the start of 2021 shows an “encouraging retail sales trend in spite of enduring Covid-related restrictions.”

Net Sales: Total net revenues for the year came in at 2.4 billion euros ($2.9 billion), down 23.6 percent on a constant currency basis from 3.2 billion euros ($3.8 billion) in 2019. Net sales in the second half declined 8 percent.

Retail sales, which comprise 88.5 percent of the business, were down 18 percent on a constant currency basis, and were down just 6 percent in the second half. Retail sales are becoming a much larger part of the business—last year it represented 82.8 percent of sales—thanks to the company’s direct-to-consumer online sales, which skyrocketed 217 percent throughout 2020.

Wholesale sales, which represent just 9 percent of Prada’s revenue, were down 49.5 percent on a constant currency basis. In the second half, the decline tapered off to 20 percent. A large share of the contraction compared with the prior year was substantially attributable to the decision to slim its network of wholesale partners to protect brand image and ensure additional retail growth.

2020 saw a change in the markets flocking to Prada products. Backed by China and its luxury-driven shoppers, the Asia-Pacific region generated 40.3 percent of total sales at Prada, a massive increase over the 32 percent of sales it took in last year. Conversely, European shoppers only represented 31 percent of sales, down from the 38.6 percent of sales the market had last year.

Leather goods remained the most popular-selling product for Prada, at 1.3 billion euros ($1.56 billion), or 54.8 percent of sales. Apparel sales totaled 604.5 million euros ($719.1 million) or 25.3 percent, while footwear brought in 442.8 million ($526.7 million) amounting to 18.5 percent of sales.

Net Earnings: Prada saw net losses of 54.4 million euros ($64.9 million) for 2020, a far cry from the 257.7-million-euro profit ($307.2 million) generated in 2019. Basic and diluted earnings losses per share amounted to 0.021 euros (2.5 cents).

Earnings before interest and taxes (EBIT) totaled 20 million euros ($23.8 million) in the full-year, down from the 306.8 million euros ($365.7 million) in 2019. But the second half’s 216-million-euro ($257.5 million) EBIT remains broadly in line with the same period of 2019, after a 196 million euros ($233.7 million) operating loss in the first six months.

Analysts had expected revenues at 2.44 billion euros ($3.3 billion) and an EBIT of 13.8 million euros ($19.2 million), based on a Refinitiv analyst consensus.

CEO’s Take: “In this disruptive year, we have managed to achieve the goals we set ourselves, thanks to the commitment and high sense of responsibility of our people,” Patrizio Bertelli, CEO of the Prada Group, said in a statement. “We quickly responded to market changes, strengthening the relationship with local customers whose consumption in the second half of the year almost fully offset the absence of tourists. We successfully reached a good level of profitability and generated significant cash flow, improving our financial position. These results give us confidence to face the upcoming rebound, as soon as the most critical phase of the pandemic will end.”