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Prada predicts return to growth in 2017 after H1 profits slump

Friday, August 26, 2016 - 23:32

[PARIS] Italian luxury goods maker Prada predicted a return to sales and profit growth next year, partly helped by improved sales trends in China, after posting a 25 per cent drop in first-half underlying earnings and net profit.

The group, which has been hard hit by the global luxury spending slump, said in a statement it saw 2016 as "a turning point from where the group will return to growth." "We expect growth to come back after this year," Prada Chairman Carlo Mazzi told Reuters in an interview. Later in a call with analysts, Mr Mazzi said the group expected both sales and profit growth to return in 2017.

Last time Prada's sales rose on a like-for-like basis, excluding currency effects and a boost from new stores, was in 2014.

The Prada group, which makes the bulk of its sales from the Prada brand, but also owns the Miu Miu, Church's and Car Shoe labels, said spending in mainland China had improved in August thanks to government measures that helped repatriate spending home.

Since April, China has been raising fees on packages ordered from abroad and cracking down on smugglers who carry in suitcases full of luxury goods, in an effort to encourage shopping at home and squeeze a grey market that enables shoppers to avoid paying taxes.

In its fiscal first half, Prada suffered particularly in greater China where retail revenue fell 24 per cent and in its home market Italy where it dived 21 per cent.

Earnings before interest, tax, depreciation and amortisation (EBITDA) reached 330 million euros (S$503.8 million) in the first half to July 31, down from 440 million euros a year ago while net profit fell to 141.9 million euros from 188.6 million euros.

After opening more shops than most of its mega-brand rivals in the past few years and raising the price of many of its handbags, Prada is trying to turn itself around by putting out more accessible products and slimming down its retail network.

It has also started rolling out a new store concept in Hong Kong, Shanghai, Zurich and Moscow to entice customers into its shops, creating a different atmosphere for each product category.

However, analysts expect it will take time for Prada's lack of perceived exclusivity to recover as competition becomes fiercer from new Western and Asian brands, while a revived Gucci under new leadership is expected to steal market share.

Most brokers have either a sell or a hold recommendation on Prada which has seen its share price fall nearly 35 per cent in the past year. "The key point for the stock is whether the company can return to a path of structural growth, via product innovation and brand buzz (similarly to what is happening at Gucci), which does not seem to be the case at the moment," New-York based broker Evercore ISI said in a note.

The group said it expected underlying earnings in the second half to improve against the first.

REUTERS