Prada Continues to Face Headwinds and Lags Peers, but Shares Are Undervalued and Declines Improving

Details From Prada Analyst Meeting Push Out Growth but Still Positive Long-Term View

Prada Sales Update Disappoints; No Change to Fair Value Estimate

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Equity Bottom-Up

We retain our narrow moat rating after Prada reported results that missed our implied full-year forecasts and consensus first-half 2017 expectations. We adjust our forecasts to reflect weaker near-term performance and reduce our fair value estimate to HKD 30 from HKD 32 per share. Our medium-term forecast implies 5.7% average top-line growth, driven by same-store sales and a 17.7% operating margin. We see shares as currently undervalued.In first-half 2017, revenue declined by 5.9% on a constant currency basis and fell 5.5% on a reported basis, compared with our expectations for a return to mid-single-digit growth over the past year’s weak comparison base. Operating margin dropped to 11.4% from 13.8% in first-half 2016, weighed down by increasing marketing investments and continuing fixed-cost under-absorption, despite an almost 200-basis-point gross margin expansion, driven by reduced markdown activity, industrial efficiencies, and currency tailwinds.We see reduced markdowns as a strategically sound move (and more easily implementable through controlled distribution channels), while continuing expansion of gross margin and strong performance of higher-priced product ranges suggest that the brand’s pricing power is not eroding. Luxury brands go through ups and downs in relative performance, and we do not think the current underperformance is irreversible. We believe that management is taking the right steps towards better merchandising and innovation in product and marketing (online and offline), which should bear fruit over time. However, underperformance highlights increased product and fashion risk in an increasingly competitive luxury market, especially for companies like Prada that rely to a lesser extent on carryover collections. By channel, retail sales were weaker than wholesale with a decline of 8% (3% of which was driven by the strategic decision to reduce markdowns), while wholesale benefited from the good performance of online pure-play partners.Among categories, ready-to-wear performed well with 4.1% growth, with strength across regions, while leather goods were weak (down 8%), despite the good performance of new collections. Footwear lagged, likely influenced by some design misses (for example, outperformance of the sneaker category, where the company's offering was sub-par). The Prada brand continues to outperform smaller brands in the group with 5% revenue decline (down by low single digits if the markdown reduction impact is accounted for) compared with a 10% drop for Miu Miu and Church’s.Analyst: Jelena Sokolova, CFA

We retain our narrow moat rating after Prada reported results that missed our implied full-year forecasts and consensus first-half 2017 expectations. We adjust our forecasts to reflect weaker near-term performance and reduce our fair value estimate to HKD 30 from HKD 32 per share. Our medium-term forecast implies 5.7% average top-line growth, driven by same-store sales and a 17.7% operating margin. We see shares as currently undervalued.In first-half 2017, revenue declined by 5.9% on a constant currency basis and fell 5.5% on a reported basis, compared with our expectations for a return to mid-single-digit growth over the past year’s weak comparison base. Operating margin dropped to 11.4% from 13.8% in first-half 2016, weighed down by increasing marketing investments and continuing fixed-cost under-absorption, despite an almost 200-basis-point gross margin expansion, driven by reduced markdown activity, industrial efficiencies, and currency tailwinds.We see reduced markdowns as a strategically sound move (and more easily implementable through controlled distribution channels), while continuing expansion of gross margin and strong performance of higher-priced product ranges suggest that the brand’s pricing power is not eroding. Luxury brands go through ups and downs in relative performance, and we do not think the current underperformance is irreversible. We believe that management is taking the right steps towards better merchandising and innovation in product and marketing (online and offline), which should bear fruit over time. However, underperformance highlights increased product and fashion risk in an increasingly competitive luxury market, especially for companies like Prada that rely to a lesser extent on carryover collections. By channel, retail sales were weaker than wholesale with a decline of 8% (3% of which was driven by the strategic decision to reduce markdowns), while wholesale benefited from the good performance of online pure-play partners.Among categories, ready-to-wear performed well with 4.1% growth, with strength across regions, while leather goods were weak (down 8%), despite the good performance of new collections. Footwear lagged, likely influenced by some design misses (for example, outperformance of the sneaker category, where the company's offering was sub-par). The Prada brand continues to outperform smaller brands in the group with 5% revenue decline (down by low single digits if the markdown reduction impact is accounted for) compared with a 10% drop for Miu Miu and Church’s.Analyst: Jelena Sokolova, CFA

狭堀プラダの2017年上半期業績は期待外れだが、修復不可能ではない。株価は過小評価されている。

Prada S.P.A.

狭堀プラダの2017年上半期業績は期待外れだが、修復不可能ではない。株価は過小評価されている。