The market believes in Prada’s potential to double its revenue

The market has faith in Prada’s potential to double its revenue by growing organically, just as Gucci did. However, according to analysts from a new survey conducted by MFF, management must focus on five key pillars to achieve this goal. The first priority is to improve productivity by enhancing clienteling systems. The company should revise its retail strategy by considering fewer stores with larger floor areas. Additionally, it should increase its focus on the overall leather goods business and invest in its new flagship product, Miu Miu.

«The moment you decide to play to scale, scale becomes important. The Prada group must have a quantitative representation at the height in the luxury universe, so we are working to double our size scale», ceo Andrea Guerra said during his speech at the first day of the MFGS-Milan fashion global summit 2023. And if doubling is the goal, it amounts to about 8 billion in revenues the target of the former Luxottica, Eataly and Lvmh manager, who last month told MFF, to which he gave the first interview since his appointment as ceo of Prada group, about the strategic goals for the company.

The company is experiencing growth, supported by the latest quarterly report. Brand perception remains strong globally, but falls short of competitors’ figures. The timeframe for the anticipated doubling remains uncertain. «The potential of the Prada brand is significant, however, currently only an ambition. Given the recent decline in luxury demand, particularly in Europe, it is important for Prada to strategize its future growth», Susy Tibaldi, director of european luxury and sporting goods equity research at Ubs, noted. «Gucci, a competitor in the luxury market, has proven resilient despite market challenges. Prada, with strong brand recognition and cultural presence, has the potential to achieve similar success. To achieve this, Prada must execute on its plans effectively to move forward», she explained.

According to Gam’s co-investment manager for luxury brands, Flavio Cereda, doubling their growth is an ambitious yet realistic target, which can be achieved in less than a decade. Cereda believes that «the industry will revert to an average compound annual growth rate of 7% in the medium-term, beyond 2024, leading to a doubling in ten years. However, since Prada is an outperformer, so we expect a shorter timeframe without any M&A necessary», he explained to MFF. «Continuing to elevate the brand, improve the channel mix, and explore cross-category initiatives remains a priority. We are pleased to see that consumer interest in the brands is increasing». During MFGS 2023, Guerra emphasized that they have no interest in pursuing new acquisitions at this time. «Our current portfolio includes Prada, Miu Miu, Church’s, and the confectionery brand Marchesi. I think we can establish a suitable position for ourselves in the next 3-5 years by focusing on achieving organic growth only», the ceo declared.

Analysts have rejected further M&A, deeming a new acquisition an unnecessary risk. According to Tibaldi, «there is much to be done within Prada, which has a lot of work ahead if it is going to double, maintain succession, and contend with uncertainties regarding how long Patrizio Bertelli and Miuccia Prada will stay». Additionally, «Miu Miu has flourished since the designer has had more time to allocate since Raf Simons’ arrival from Prada. It was a small brand that struggled for many years, but has now made a strong recovery and will play a pivotal role». Guerra’s objective is to transform Miu Miu into a global brand. In the first nine months of 2023, retail sales increased by 17%, resulting in almost 2.98 billion euros. A significant proportion of this growth can be attributed to the brand’s 49% increase in revenue. The Lyst index also ranked the brand as the most beloved globally during the third quarter.

The primary challenge for Prada to gain market share against its competitors lies in improving store productivity. «Our estimates show that Prada will generate around 30,000 euros per square meter this year, a significant improvement considering the productivity was around 20,000 euros in 2019 before the turnaround began. However, it is worth noting that Prada achieved 30,000 euros per square meter in 2012 when the brand was at its strongest», she continued. «From 2019 to 2023, there was an increase, but when compared with competitors in the industry, Gucci peaked above 40,000, Louis Vuitton, the best in class, is at around 80-90,000, and Moncler generates 36,000. Although Prada has beautiful and large boutiques, they are not currently productive enough». As of the close of fiscal year 2022, the Prada group owned 612 stores and 26 franchised outlets. Gucci had 528 stores worldwide and a sales revenue of 10.5 billion euros in the previous year. By contrast, this company has approximately 100 more stores.

To achieve higher productivity, Ubs suggests optimizing some spaces by assessing the appropriateness of having numerous stores. Closing some stores and refocusing on specific locations may be better. «Prada stores are not available in certain areas of the US, like the new luxury hubs in Austin, Houston, and Seattle where other fashion houses are opening. There is a trend towards larger stores as they provide a better representation of the brand and enhance the overall experience», Tibaldi added, noting that the Milan-based Group tends to have many small stores compared to their competitors. «Our analysis shows that Prada stores have an average size of 270 square meters, while Gucci averages 360 square meters, and we estimate Louis Vuitton and Dior to be above 400 square meters. However, I do not believe that the expansion of physical space is driving this growth. The main challenge will be improving store productivity, which Guerra addressed in his initial presentation to the Group».

Two initiatives exist to improve this metric. The company reports no issues with traffic but rather with conversions, meaning the number of visitors who make a purchase. To enhance conversion, sales staff must undergo training to familiarize themselves with the most advanced clienteling systems and to strengthen their relationships with customers. The Group has begun addressing this issue by launching pilot projects in various global regions, where sales staff undergo varied training. «According to the company, current results are promising, albeit progress across the vast network may be gradual». The Ubs analyst explains that «this is a critical aspect that had previously been underestimated before Guerra’s arrival». Also according to Mediobanca research, with the Prada and Miu Miu brands experiencing strong momentum, the objective of enhancing retail productivity appears more achievable.

Secondly, it is noteworthy that brands with exceptionally high productivity excel in leather goods and, essentially, in handbags. «Although Prada has made significant improvements, it remains heavily reliant on ready-to-wear, which has lower productivity structurally. Selling apparel requires a significant inventory due to the need for various sizes and product ranges. This amounts to hundreds of garment options. However, selling bags does not require a large inventory. Since the average cost is higher for bags, selling just one can generate the same amount of profit as selling many garments». In the first nine months of 2023, the leather goods category accounted for 47% of the Group’s total, generating almost 1.4 billion euros, an increase of 8%. However, despite the success of recent launches like the Re-Nylon line, the development of new collections of iconic bags is needed. «It may be a lengthy process, but it is a vital aspect to consider if the goal is to double sales», Tibaldi stated.

Last but not least, according to Mediobanca research, there will be a 4-6% price increase in 2023, followed by a similar increase in 2024. Morgan Stanley explains that «the Prada Group’s recent initiatives will likely narrow the sales density gap with competitors and generate operating leverage. We upgraded Prada’s rating to overweight because it has gained the most talented additions to its management team in the past two years compared to other companies we cover. Recent results confirm our belief that Prada’s self-help strategy will outperform the luxury sector in the coming months, despite its increasing challenges». Prada’s management is well-organized, with proper priorities, and has shown impressive execution so far.

The potential dual listing is still uncertain, even though it was initially discussed last year. Andrea Guerra stated in an interview with MFF that «the project is still being researched and studied, however, it is not yet considered a top priority». Despite this, the market remains optimistic about the possibility of a dual listing in both Hong Kong and Milan. The neutral rating given by Mediobanca research is largely attributed to liquidity concerns resulting from the stock’s listing in the Asian metropolis, according to analysts. «The current listing on the Italian stock exchange is currently on standby. However, we remain optimistic as there is strong demand from investors. We have the impression that the management is continuing to work on it in the background», Susy Tibaldi concluded. «Additionally, there has been discussion of a technical dual listing that would allow the family to maintain the current free float, while also giving investors the chance to buy and sell shares on the Italian stock exchange. For now there are no updates, but if there were to be any, they would certainly be beneficial». Flavio Cereda shares the same view, arguing that «dual listing is unavoidable and Andrea Guerra has addressed it previously, although it may not be a top priority». (All rights reserved)