Prada shares hit all-time low as China’s slowdown hits sales
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Prada shares have fallen sharply in Hong Kong, after analysts reacted negatively to the fashion company’s latest financial results which came in well below expectations.
The Italian fashion house, which specialises in leather fashion and fashion accessories, shoes, luggage, perfumes, and watches, reported third -quarter sales of €747.7 million, down 6% from €792.3 million a year earlier, as sales in China deteriorated further and US sales were hit by the strength of the dollar which crimped tourist spending.
The sales were well below analysts’ expectations of about €816 million, while earnings before interest, tax, depreciation and amortisation of €155 million came in below expectations of €170 million. Prada’s efforts to improve the efficiency of its supply chain boosted gross margin, but this was then more than offset by higher operating costs associated with its retail expansion.
Retail sales were down 4% overall, with wholesale sales down 26%. Retail sales fell 17% in China, which the company blamed on the volatility in the Chinese stock market in August and September, and were down 4% in the Americas, offsetting rises of 2% in Europe and 8% in Japan. Middle East sales were down 3%.
Those sales were flattered by the weakness of the euro, and were even worse at constant exchange rates. Chinese sales were down 26%, Americas sales down 13%, and Middle East down 4%. Japanese sales were only up 4%.
Prada’s growth in Europe was also a marked slowdown from the 10% and 12% growth reported in the first and second quarters of the year, respectively.
“Prada also commented that the recent attacks in Paris have deterred tourist traffic from Europe. Some improvements in mainland China were noted, but trends are difficult to extrapolate at this point, while the US sees continued weakness, with a promotional market into the seasonal period a further headwind,” writes Nomura Analyst Christopher Walker.
He notes that Prada has pledged to better harmonise its global prices, with a target of reducing the price gap between China and Europe to about 10% to 15%. Prices of some new products in Europe have already been raised, but Walker thinks Prada “may need to take more immediate action on Asia pricing”.
Nomura is retaining a Reduce rating on the stock, and has lowered its target price for the stock to 26 Hong Kong dollars.
“may need to take more immediate action on Asia pricing”
Prada’s shares fell 6.6% to HKD24.85 a share in Hong Kong on Wednesday, marking a new all-time low for the stock and meaning they’re down 42.9% so far in 2015.
J.P. Morgan Cazenove has cut its earnings estimates for the year as a whole by a further 6% on the back of Prada’s third quarter report, and has reduced its target price for the stock to HKD33. The broker has a Neutral rating on the stock.
Its analysts think Prada is compounding a tough environment for the luxury sector with brand-specific issues and high operating expenditure that it’s only just getting under control.
They also think that Prada’s warning of a further deterioration in European sales since the terrorist attacks in Paris bodes ill for the luxury sector as a whole, although Prada looks like being among the worst hit. Most of the sales luxury goods companies make in European cities like Paris and London come from tourists.
“The further deterioration in the trend is not a surprise: tourists are critical to the luxury goods sector and the Paris tragic events dent tourist flows (note that Japan Airlines announced that it was stopping its Paris-Tokyo Narita routes today until March after a 60% slump in bookings),” they write. “Peers though seem to have noticed mainly an impact in Paris and Brussels and not in other European capital cities.”
The analysts think the fourth quarter of 2015 will be weak for the whole luxury sector, as the Paris attacks weigh on European sales. They think sales will remain strong in Japan; improve in South Korea; be slightly improved in Asia Pacific due to weak comparative figures from a year earlier; and remain weak in the US.
Nomura and J.P. Morgan Cazenove weren’t the only analysts to cut target prices for Prada’s stock on Wednesday. Bryan Garnier slashed its target price to HKD41, from HKD52, and Bernstein cut its price to HKD25 from HKD26.50. Bocom International Securities reduced its rating to Sell, from Neutral.
Questions & Answers
Q.How much did Prada's third-quarter sales fall compared to the previous year?
How much did Prada's third-quarter sales fall compared to the previous year?
Prada's third-quarter sales were €747.7 million, down 6% from €792.3 million a year earlier. This figure came in well below analysts’ expectations of about €816 million.
Q.Which regions experienced the most significant sales declines for Prada?
Which regions experienced the most significant sales declines for Prada?
Sales in China fell by 26% at constant exchange rates, while Americas sales were down 13%. The Middle East also saw a 4% decline under the same conditions.
Q.What effect did Prada's retail expansion have on its operating costs?
What effect did Prada's retail expansion have on its operating costs?
Higher operating costs were associated with Prada's retail expansion efforts. These costs more than offset the boost to gross margin achieved through improvements in supply chain efficiency.
Q.Why do analysts expect European sales for the luxury sector to be weak in the fourth quarter?
Why do analysts expect European sales for the luxury sector to be weak in the fourth quarter?
Analysts believe the recent attacks in Paris will weigh on European sales, deterring tourist traffic. Tourists are critical to the luxury goods sector, and the Paris events have already impacted tourist flows.
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