Meeting Takeaways: Prada 1H22 earnings above; current trend stays firm
- 1H22 earnings jumped 94% y-o-y, above expectations
- Latest performance sustains positive growth despite a higher base and macro uncertainty
- We revise up earnings slightly by c.2% in FY22-23 and lift TP to HK$68.3. Maintain BUY on strong brand potentials
1H22 growth beat expectations. Sales rose by 26.6% y-o-y to EUR1.9bn (or up 22% on constant rates), mainly driven by its robust retail division that scored 31% revenue growth to EUR1.7bn. All product categories expanded strongly, with sales of leather goods up 18% to EUR928m, ready to wear up 32% to EUR497m, and footwear up 39% to EUR406m. All brands also saw firm revenue growth, including PRADA up 29% to EUR1.6bn, MIU MIU up 13% to EUR216m, and CHURCH’S up 24% to EUR20m. Excellent growth in key markets of Europe (+58% to EUR590m), Americas (+56% to EUR409m) and Japan (+25% to EUR169m) more than offset the impacts of various COVID-19 lockdowns in China and sanctions on Russia.
Strong margin expansion. On the back of strong retail sales along with enriched product offerings and effective marketing strategies; the completion of wholesale rationalization; and dedicated efforts on operational & efficiency enhancement, 1H22 gross margin climbed 3.4ppt y-o-y to a new record high of 77.7% (FY21: 74.5%). EBIT margin also improved 5ppt to 16% (FY21: 14.5%). As such, EBIT surged 83.7% to EUR305m even after the write-down of EUR26m from Russia operations, while net profit jumped 93.6% to EUR188m, exceeded expectations. Further efforts on branding, research & development (R&D), product-mix refinement, coupled with better operating leverage should provide additional room for margin improvement ahead.
Latest sales trend on track. Despite a low visibility in global political and economic outlook and a higher base for 2H22, We believe Prada sustains decent positive sales for Jul 2022. Mainland China has seen an improved trend since store re-openings in Jun 2022. While the US market could signal slower growth lately, its rising number of outbound travels especially for Europe could support tourist consumption there and benefit Prada performance on the whole. Multiple opportunities have also been seen in other regions of the Asia Pacific, including sound performance in South Korea and South East Asia. The company stays confident on its ongoing performance.
Investment in the right areas. In recent years, Prada continues to invest in all the promising divisions that include retail, e-commerce, digital, vertical integration, talent, branding, ESG, etc. The company targets to complete renovation of all stores by end-2023 (1H22: renovated c.60 stores) to further escalate its brand powers. It will also spend more efforts on sourcing innovative materials, especially on leather, and increasing visibility across the whole supply chain to align with better environmental and social compliance. Increasing popularity of its brands, as seen from the rise in 2Q22 rankings for PRADA to No. 3 (1Q22: No. 4) and MIU MIU to No. 7 (1Q22: No. 10) of the Lyst Index that ranks fashion’s hottest brands reinstates growing attractiveness of Prada’s brand performance.
Strategic product-mix refinement. To better ride on its growth potentials, the company has set its priority to lift leather goods’ contribution to c.60% of group revenue (1H22: 51%) in about 5 years. This could be achievable through the offering of a bigger product portfolio via better R&D and closer collaboration with suppliers, while sustaining expansion of other product segments too. By doing so, we believe Prada could further enrich its brand equity for market share gains ahead. Overall, the company will continue to invest for medium to longer term sustainability, and stays confident on its ability to achieve medium-term targets despite macro uncertainty.