Prada loses US$700m in value as China slowdown hits profits

[HONG KONG] China's slowdown has claimed another corporate scalp, with shares of Italian fashion house Prada SpA sliding the most since January after a pullback in the world's biggest consumer market contributed to an unexpected drop in annual profit.

The Hong Kong-listed luxury group attributed a slump in Asia mostly to Chinese tourists pulling back spending in Hong Kong and Macau because of the weakness in the yuan. Other luxury brands including Gucci have seen the impact of softer buying by Chinese tourists offset by increased spending on the mainland, but Prada failed to get a similar boost from Chinese spending at home, said Citigroup analysts led by Thomas Chauvet.

Prada's China sales were flat for the year, a "significant swing" after a first-half gain of 17 per cent, Citigroup noted.

Chinese consumers have turned cautious amid the slowest economic expansion in almost three decades and a trade war with the US. While cars and iPhones have seen bigger slumps so far, Prada's results will spark worry that China's newly wealthy middle class is now scaling back on high-end purchases. For an industry that relies on Chinese demand for 30 per cent of US$1 trillion in global luxury spending, that's a chilling prospect.

Prada's operating profit declined 10 per cent to 323.8 million euros (S$495 million), falling short of the 378 million euros predicted by analysts. Prada shares slumped as much as 9.2 per cent in early Hong Kong trading Monday, the biggest intraday drop since Jan. 14. The stock has lost about 36 per cent over the past year.

CMB International Securities Ltd. analyst Walter Woo said the profit miss was surprising, even after the firm downgraded its forecast recently on weaker China sales.

"We haven't seen significant recovery in its China sales during the first two months this year after a weak fourth quarter in 2018," Woo said. "We still expect the business improvement for Prada will be slower than peers in 2019, as it takes time for the brand to upgrade its product design and retail operations in the country."

Prada has seen its earnings tumble for four straight years, falling more than 50 per cent since their 2014 peak as the group raised handbag prices and took too long to come up with products to follow up its best-selling Galleria line.

This year, however, revenue returned to growth as the brand rolled out new handbags like the US$3,000 Sidonie shoulder bag and fresh shapes in its more affordable black nylon that helped win the favor of younger shoppers. But the cost of investing in e-commerce and social media as well as staging pop-up stores and parties to reignite interest in the brand all incurred additional costs.

BLOOMBERG