Prada falls on tough times in China
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Italian fashion brand Prada is suffering from shrinking demand in its largest market of China, with a 20%-plus drop in first-half sales dragging down overall profit to the same degree.
The Hong Kong-listed, Milano-based company announced late Friday that net revenue dropped 15% on the year to 1.55 billion euros ($1.37 billion) for February to July. The fall was “entirely attributable to a sales decline in the retail channel as the wholesales and royalties were positive,” Prada said. Retail net sales, accounting for more than 80% of net revenue, sank 18%.
A significant blow came in greater China as sales from directly operated stores fell 24% to 278.7 million euros. On top of lower sales at stores on the mainland, “Hong Kong and Macau continued to weigh heavily on the region’s contraction,” the company said. China’s anti-corruption campaign and economic slowdown bit into purchases of pricey items. A reduced appetite for travel by mainlanders to Hong Kong and Macau also took a toll.
The fall in revenue was not confined to greater China. All of its geographic categories, brands and product lines suffered declining sales. By product, sales of its signature leather goods dropped 22%, “especially in the Far East,” according to the statement.
Excluding greater China, Europe was another hard-hit region, with a 21% drop in net sales. The main reason was terrorist attacks in major cities, with the company blaming a “reduction of traveler flows, resulting mainly from the publicized tragic events.”
“Hong Kong and Macau continued to weigh heavily on the region’s contraction,”
But there were some silver linings in Europe as well. Russian sales saw double-digit growth in local-currency terms, and the U.K. apparently benefited from “the weak pound after the Brexit” vote. Casualties in Japan and the Middle East were relatively light, with retail sales declining just 2% and 1%.
Net profit decreased 25% to 141 million euros even after such belt-tightening measures as cutting labor and lease costs as well as advertising and communications expenses.
Along with launching new collections to stimulate its customers’ appetite for buying, the company is upgrading important stores while shutting down others. Eighteen new outlets were opened in the half, while 14 were closed, bringing the number of directly owned stores to 622. The company continues to refurbish strategic stores into so-called new-concept stores in such key locations as a GUM department store in Moscow facing Red Square, and the Plaza 66 complex in central Shanghai on bustling Nanjing West Road.
Prada closed 1.6% higher here at 21.65 Hong Kong dollars on Friday, ahead of the earnings announcement. Despite seeing some gains that day, the shares have lost more than 10% since the start of the year, while the benchmark Hang Seng index has risen 4.5%.
Questions & Answers
Q.Which specific sales channels or segments were most affected by Prada's difficulties?
Which specific sales channels or segments were most affected by Prada's difficulties?
The retail channel experienced a significant decline, sinking 18%, and was solely responsible for the overall revenue drop. Sales from directly operated stores in greater China fell 24%.
Q.What measures did Prada take to mitigate the impact of reduced sales on its profitability?
What measures did Prada take to mitigate the impact of reduced sales on its profitability?
Prada implemented cost-cutting measures, including reductions in labour, lease costs, advertising, and communications expenses. They also opened 18 new outlets while closing 14.
Q.Were there any regions where Prada's sales showed positive performance despite the overall decline?
Were there any regions where Prada's sales showed positive performance despite the overall decline?
Yes, Russia saw double-digit sales growth in local currency terms. The UK also reportedly benefited from the weak pound after the Brexit vote, suggesting a positive impact there.
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