Prada S.p.A. (1913) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Prada Group First Half 2022 Results Presentation Call and Webcast. [Operator Instructions] And please also note that today's conference is being recorded. I would now like to hand over to the speaker, Mr. Andrea Bonini. Please go ahead.

Good afternoon, everyone, and thank you for joining the Prada Group's first half 2022 results conference call. This is Andrea Bonini, Group CFO, and I'm delighted to be talking to all of you for the first time in this role. With me today is Mr. Patrizio Bertelli, our CEO and Founder; Mr. Paolo Zannoni, Chairman; and Mr. Lorenzo Bertelli, Marketing Director and Head of CSR. Today, Mr. Bertelli will open with the group's business update. Mr. Lorenzo Bertelli will continue with an overview of our marketing and communication activities and the group's ESG progress. I will then go through the financial review and to conclude, Mr. Zannoni will share final remarks. After the presentation, we will be pleased to take your questions. Now I'd like to hand over to Mr. Bertelli.

Good afternoon, everybody, and welcome to Prada Group First Half 2020 Results Conference Call. Despite the complex macroeconomic and geopolitical context, we are satisfied with the results achieved in the first half, both in terms of revenues and in terms of margins. Thanks to our global presence and to the geographic distribution of sales of the group, we have more than offset the impact deriving from numerous lockdowns in China and from the conflict in Ukraine. I'd like to start by providing you the most relevant economic data and the summary of our actions in the first 6 months. We recorded total revenues of EUR 1.9 billion growing 22% at constant exchange rates compared with the first half of 2021 with the retail channel growing 26%. Gross margin stood at 77.7% and the adjusted EBIT margin at 17.4%. These results certify to the progress made in implementation of our strategy and to its efficacy. We kept investing in industrial activity to guarantee sustainable growth in the long-term also in terms of ESG. Finally, I emphasize that these results placed the group on an accelerated path towards achieving the medium-term targets we have announced last year during the Capital Markets Day. The Prada Group distinguishes itself for a contemporary vision of luxury goods, which reflects itself in the identity of its products and brands. We kept investing in creativity and quality to offer higher value products. Our average prices have increased, thus keeping a wider product architecture, and this contributed to a double-digit growth for all categories. Our focus on direct distribution led to a significant like-for-like growth, which is reflected in a similar increase in sales per square meter. The valuing of our distribution network remains a fundamental pillar of our strategy, and we are accelerating in renovations with important restyling projects, the launching of new products and the selective openings in key markets. The growth of the online channel continues while we keep a selective approach to the wholesale channel. Also, the investment plans in our production, in people, and technology continues to improve the industrial know-how and the lather group to have tools that will allow us to improve quality, develop products and guarantee productive efficiency. As I said at the beginning of my report, sustainability is core to the strategy of the group, and it is ever more integrated into our business logic. The group recorded a very good first semester with a strong revenue increase and important results in all product categories and in all markets, excluding China, due to the lockdown in the second quarter, and Russia where sanctions have come into force last March. The retail channel grew by 26% at constant exchange rates on an annual basis and by 38% compared to the first half of 2019. The sound growth in sales and operating efficiency have strongly improved profitability, allowing us to reach a gross margin of 77.7%, and an adjusted EBIT margin of 17.4%. Extraordinary market conditions in Russia required a write-down of EUR 26 million. Despite this, we keep supporting our people, and we strongly hope in a positive development of this situation, which will allow us to reopen our stores and restart our activities there. Our financial structure is sound with a net financial position of EUR 180 million allows us to keep investing and further accelerating the execution of our strategy. Operating priorities for the second half of the year. Our priorities for the second half of the year are continued enrichment of the offering by developing products with a strong identity. Then we want to focus on leather goods, which are recording great results. And we also won the contribution of leather goods on the total revenues to increase, reaching 60%. Further investments in the network of our stores and the digital channel to guarantee a shopping experience that will be ever richer and omni-channel. The strengthening of our industrial supply chain, also with small acquisitions of production realities that we expect to conclude soon. And last, we want to keep a disciplined approach on costs and capital allocation. I will now leave the floor to Lorenzo Bertelli, who will give you the details of the marketing and sustainability strategies. Thank you.

Thank you, and good afternoon. A critical driver for product group performance is our relentless focus on our customer and marketing strategy. It's a reflection of our brand distinctive vision on one side and of the communities we engage with on the other. In the first 6 months, we have worked to optimize our existing processes, constantly finding new ways to challenge our approaches and assumptions, maintained the perfect balance between iconic and new format is key. We strive for creative solutions and ideas to create dialogues with the new existing customers that are engaging and rewarding, while also challenge the convention. All this requires ongoing investment while remaining disciplined to remain loyal to our DNA. Looking at Prada specifically, we are constantly looking for new ways to develop and extend our marketing and communication initiatives, and we are seeing continued success through our delivery and both iconic and disruptive formats. The attention to Prada collection co-designed by Miuccia Prada and Raf Simons keeps growing. With Prada Men' SS23 mentions, up 43,000% versus SS22. We have continued to work with highly relevant talent in our latest advertising campaign, including Jeff Goldblum, Damson Idris, Rami Malek with Miuccia Prada collaboration on Baz Luhrmann's Elvis movie. As well as the presence of the cast dressed in Prada at the last Met Gala generated high visibility for the brand. We continue to push boundaries with Linea Rossa into extreme sports space through a series of collaboration with Red Bull which is delivering extra result and engagement. We also successfully and creatively approached Web3 with amazing results from our Timecapsule latest drops paired with NFTs, and the partnership with Meta featuring Avatar in Prada for the launch of the Avatar store. The Miu Miu brand continues to go from strength to strength as its visibility increases, so thanks to strong focus on communicating its clear identity. The highly successful Fall/Winter 2022 fashion show empowered by Artistic collaboration, saw live streaming engagement up to 1/3 on the last run of show. And for the first time, the brand unveiled a leather goods campaign dedicated to the new Miu Wander bag, which register a strong performance in terms of engagement and reach. Sustainability runs through all our brands with a key example in the new Miu Upcycled project. Now in its third episode, which was introducing during the last show. On this slide, you can see the clear impact that we are making across our brand marketing as we continue to build on the brand heat momentum for both Prada, Miu Miu with increased engagement and interest across dotcom, search, share and brand dynamics. Let me conclude by reminding you of news that was announced at the beginning of this week. After staging a simultaneous show in Milan and Shanghai last September, we are very excited to be showing our Prada for Fall/Winter 2022 collection in Beijing on August 5. Underlining, once again, the need to be meaningful exchanges, which is at the heart of our vision. With that, I would like to talk in more details on our approach to ESG. We're ambitious about reducing our environmental impact and improving such as sustainability as we recognize the increasing importance of ESG to strengthening reputation and ensure long-term growth. In order to set ourselves up for success, we decided that we had made some extension and strategic changes within the business to play sustainability at the heart of our approach. The Board appointment of Pamela Culpepper and Anna Maria Rugarli, who has extensive experience in ESG, is accelerating our progress in all areas. In the short term, the focus will be on carrying out an approved action plan to improve ESG performance and in the medium to longer term, identifying the areas where we can take a leadership position within the industry. Following our introduction of ambition, SBTi approved carbon reduction goal last year, we have put in place a set of concrete action to meet our Scope 1 and 2 target by 2026. While we're pleased to progress in this area, we're also addressing our Scope 3 emissions. It is fair to say, like many in our industry, we have significant work to do here, but we will actively engage with our supply chain and build a plan to help drive down emissions. Prada Group is also committed to circular thinking and responsible materials sourcing. We have led the way with our work on, but we recognize that use of leather remains a big challenge for the industry due to its high environmental impact. To tackle this, we have started an internal project on the traceability of leather procurement through closer collaboration with suppliers and continued review of environmental standard across our value chain. We also committed the responsible leader sourcing by 2023, in line with standards set by the Leather Working Group, the world's leading environmental certification for the leather manufacturing industry. Our flagship educational program Sea Beyond in partnership with UNESCO designed to increase awareness of sustainability and ocean preservation has now trained over 600 secondary school students globally. Ten schools across the world joined the second edition and the winners were announced at the International Ocean Conference in Lisbon. Sea Beyond project also reached our employees on global scale through ocean literacy content, which will continue to be delivered along the year. In addition, we recently launched an open air lesson programming for kids to start in September 2022. What is vital that we take strong action on climate issues, our progress in terms of structural initiatives have also been considerable. We are proud of the project we have undertaken in the United States, and we are now using our learnings to create more opportunities across the group as a whole. Recently, we have launched an internal survey in DE&I, and we've put in place robust sustainability training for Board members and all employees. We are excited about the progress Prada Group has made so far and look forward to accelerating this momentum as we further integrate ESG commitments and behaviors within the business. With that, I will hand over to Andrea Bonini who will run through the financial review. Thank you.

Thank you, Lorenzo. I'm delighted to present a very solid set of results for this semester. Page 16, key financial summary. The group reported net revenues of EUR 1.9 billion, plus 22% versus both H1 2021 and H1 2019 at constant FX. Exchange rates had a positive impact on net revenues of 4.2 percentage points versus H1 2021 or circa EUR 62 million. Retail sales amounted to EUR 1.7 billion, up 26% versus H1 2021 and plus 38% versus H1 2019, again at constant FX. EBIT adjusted is equal to EUR 331 million with 17.4% margin. EBIT adjusted excludes other nonrecurring income and expenses that for the semester consisted of EUR 26 million write-down of noncurrent assets in Russia. The 17.4% margin in H1 2022 compares with 11.1% in the corresponding period of last year and therefore, shows a meaningful improvement in profitability. Net income, which is not on the slide, but you will find in the appendix, as always, stood at EUR 188 million. Moving to net operating cash flow, it was positive for EUR 158 million, and we closed the semester with net cash of EUR 179 million. Page 17, Net sales by channel. The retail channel remains our priority and now represents 90% of sales. Retail sales continue to drive growth in the period, up 26% versus H1 2021 and 38% versus 2019 at constant FX. This performance was entirely driven by like-for-like increase with almost nil space contribution. Notably, there was a sequential acceleration between quarters on a 3-year stack basis and when comparing the quarter to 2021, notwithstanding the difficult comp in the second quarter of last year, the deceleration is very modest. Online sales increased strongly in all regions during the period, with a growth rate largely above the physical channel. Online penetration on sales remained stable due to the strong growth of the physical channel. On wholesale, channel rationalization is complete, but we maintain a very selective approach. Therefore, we closed the semester with sales at minus 3%, also due to the continued traffic challenges of the DFS channel. Page 18, retail sales by geography. The results of this semester, really showed the benefit of our global presence and well-balanced geographical distribution of sales as we've been able to more than compensate the impact of protracted lockdowns in China and of the sanctions on Russia. Asia Pacific declined by 7% year-on-year at constant FX to EUR 590 million as lockdowns in Mainland China from mid-March impacted circa 30% on average of the group's network in that area. This impact was mitigated by the strong performance in Korea and Southeast Asia. Coming back to Mainland China, we have seen an improved trend in store reopenings in June. Strong performance in Europe with sharp growth of 89% year-on-year across the region, driven by domestic sales and an uptick in tourism in Q2 2022. The Americas also generated an outstanding sales performance of EUR 360 million, up 41% year-on-year and triple-digit growth on 2019. Japan saw an accelerating trend this semester, generating EUR 161 million of sales, up 28% year-on-year. Middle East also registered a solid performance with sales up 24% year-on-year. Page 19, retail sales by product. All product categories registered double-digit growth. In leather goods, we've seen a substantial acceleration on a 3-year stack basis at plus 24% compared to plus 7% in fiscal year 2021. Year-on-year, the increase was plus 18%. Driving the growth is a very good mix of new and iconic lines of bags and accessories. Ready-to-wear registered plus 32% growth on H1 2021 and footwear plus 39%, driven by lifestyle and new collections. Page 20, retail sales by brand. Turning to retail sales by brands, Prada, which contributed 87% of our sales registered a 28% increase year-on-year and an impressive plus 46% on H1 2019. This result was driven by all product categories and with a balanced growth in terms of gender and age groups. Miu Miu turned positive on a 3-year stack and registered 14% growth year-on-year. Thanks to the success of the third episode of Upcycled, Wander bag and other products and initiatives. Lastly, on Church's and other, which includes Marchesi and Car Shoe. These businesses were highly impacted by the pandemic and lockdowns in Europe in previous years given the footprint and now we're seeing a recovery. Page 21, gross margin development. Gross margin reached 77.7% in the first semester, improving by 340 basis points versus the same period of 2021 and by 90 basis points versus second half 2021 when it stood at 76.8%. This significant improvement was mainly driven by average price and channel mix, slightly offset by counter mix and cost inflation. And here on the page, we mentioned logistic costs, as an example. Overall, these factors drove an increase of 280 basis points of the total 340. We also registered the positive FX impact of 60 basis points as we saw strong appreciation in the U.S. dollar and renminbi, among others. Page 22, operating costs. OpEx on net revenues declined from 63.2% in H1 2021 to 60.3% in H1 2022, a 290 basis point improvement. At constant FX, OpEx increased by 17% year-on-year, driven by the variable component, a significant decrease in COVID contributions, higher discretionary A&P spend, higher labor costs and a broader normalization of business activities post pandemic. As a result, EBIT adjusted increased by 99% and the margin improved from 11.1% in H1 2021 to 17.4% in H1 2022, a 630 basis points improvement, of which 340 from gross margin and EUR 290 million from OpEx. Page 23, CapEx. Capital expenditure in the semester was EUR 97 million. Retail CapEx includes circa 60 renovation projects with a plan to further step up the effort in the second half. In the semester, the group opened 7 new stores, but we also had 15 closures, mainly Church's. And therefore, as of June 30, the total number of stores have declined to 627 versus 635 as of December 31. Excluding retail, of the remaining EUR 35 million, approximately half relates to industrial CapEx and the rest is for the vast majority IT. Page 24, net operating working capital. The net operating working capital was stable compared to last year as a percentage of LTM net sales at 18%. In absolute value, there was an increase of EUR 78 million, mainly driven by inventory, reflecting higher sales volumes. Page 25, net financial position. Our net cash position decreased from EUR 238 million at 2021 year-end to EUR 179 million as of June 30. Notwithstanding the significantly higher operating results, as we saw on the previous slide, net working capital increased in absolute value and we paid dividends in the semester for EUR 170 million. With reference to row other, it includes as negative items the delta in taxes between P&L and paid and prepayments, mainly A&P and other contracts, only partially offset by positive items such as FX benefits on liquidity and other nonmonetary items. Now it is my pleasure to leave the floor to our Executive Chairman, Mr. Paolo Zannoni, for closing remarks. Thank you.

Thank you, Andrea. The Prada Group outlined strategy in late 2021. Since then, we have improved financial and operating performance across the group, and we will keep doing it. You have seen that our hard work is bearing fruits. Customers like who they see our numbers get better. All of that makes us highly confident then the Prada Group will achieve its medium-term targets. Yet, as we all know, the global outlook is highly uncertain. There are several dynamics in play that could impact performance negatively in the next 6 months and beyond. We are aware of the risk and will be vigilant, ready to face them. Yet we stay focused on striking the right balance between enduring margin improvements and the investment needed to deliver long-term growth. Thank you all for listening to the presentation. We will now take your questions.

[Operator Instructions] The first question comes from the line of Melania Grippo from BNP Paribas Exane.

This is Melania Grippo from BNP Paribas Exane. I have 3 questions. the first question is the Mainland China. If you could please elaborate in the performance in Mainland China during Q2, and especially on exit rate...

Sorry to interrupt, but we cannot really hear.

Yes. Let me try this way. So my question is if you could please elaborate on the performance on your performance in Mainland China during Q2 and especially on your exit rate and compared to what you're currently seeing in July? How confident are you that the demand will come back?

I'm sorry, I'm not sure whether this is a problem on our side, but we can -- we're really struggling to hear. Can we please try with the next question and then go back?

Yes. Could you please elaborate on the performance in Mainland China during the quarter? And what are you currently seeing? I mean your exit -- what was your exit rate in June and what you are currently seeing? And how confident are you that demand will come back?

This is Patrizio Bertelli speaking. During the month of July, the signals we get from China is just what we had in 2021, so we do see a recovery. Before that, because of COVID, it was a pretty patchy situation. So we need to understand what's going to happen there. So this morning, we just heard that part of the City of Wuhan is back into lockdown. So when we don't have any pressure from COVID and lockdowns, we realized that the market is ready to recover immediately. Thank you.

And if I may have a follow-up question is on your store network update. You renovated around 60 stores. Can you tell us what are you planning for the remainder of the year in terms of both the renovations as well as openings? And also if you open any pop-up store in the first half, how many?

Yes, this is Patrizio Bertelli speaking again. We have renovated much -- well, actually, quite a few more stores and the Prada Stores only. We are still busy working on these stores in July and August. So, again, in Prada and Miu Miu between September and the end of the year, we're going to open 12 new stores. And as far as pop-ups are concerned, we have a pretty articulated pop-up program, and we're going to have about 20 pop-ups.

Next question please.

The question comes from Susy Tibaldi from UBS.

Congratulations for another strong set of numbers. I have 3 questions, but I will ask them one by one. So the first one, so in the previous presentations, you were showing this beautiful chart with the quarterly retail sales growth versus 2019. So I was wondering if you could comment on what was the growth of retail in Q1 and in Q2 versus 2019? If I heard correctly, you mentioned there was a small deceleration in Q2. And I guess, I mean, we've seen that for many peers because of China. But it would be great if you could comment on that. And maybe also in the U.S., because in the U.S., you have been one of the companies to grow the most compared to 2019. And obviously, the comparison base is getting very, very tough. So can you spend some time to talk about the U.S. market?

Andrea Bonini, the Group CFO, and thank you. So on the first question on the retail organic growth versus '19. So on a 3-year stack, we actually have an acceleration. And so we go from 34% to 41% in the second quarter. The slight deceleration that I mentioned is with reference to 2021. And as I said, I mean, it's a very -- it's frankly a slight deceleration, because we continue to see very strong growth in the second quarter as well. And in the other point, in absolute value, clearly, our second quarter was higher than the first quarter. And as we all know, I think in the second quarter, I mean, there's a number of factors impacting from the main one, the lockdowns in China and also a more difficult comp in 2021. On the U.S., I will leave it to Mr. Bertelli to answer and please.

As for the United States for the situation is a situation of growth for us. We have seen some slowdown signals, but we've got to be very careful because currently, Americans are traveling the world. They're all going around as tourists, and it is the Americans who have led to an increase in sales in Europe for the whole business. So I mean it's difficult to give you financial analysis because sometimes we tend to forget that North America, but also Central America, came here to Europe for their holidays. And therefore, they have led to a strong increase of sales in Europe. I don't think this is going to be a problem. We are growing also now in the U.S. But obviously, we'll have to see what the situation will be like at the end of August. At that point, it would be possible to assess whether the tourist flow has simply helped Europe, and this will certainly be true. And see instead if Americans coming back to the U.S. compared to last year's trends will lead to a proper slowdown or will remain balanced with last year. But as for the Prada brand, we are pretty sure we will be able to grow, maybe not strongly, but we're confident we're going to have a growth anyway.

So my second question will be for Mr. Bonini. So you have now joined Prada for a few months. And so I was wondering -- I mean, if there was any initiatives that you're planning when it comes to the way that the business is managed from a cost perspective? And also your thoughts about the profitability of the group, like what are your key priorities? And at the moment for this year, we are seeing EBIT margin consensus of 17.5% for full year, so what your thoughts on this would be?

So it's early days, but I've been able to visit some of our key markets and first impressions, I mean, I think it's a very exciting time for the group. People have positive energy. I mean, there's clear momentum and the size of the business is -- I think it's just catching up with the size of the brand. We are lucky because we have visionary founders still involved in the business, and we have a clear succession plan. The group is investing in all the right areas, retail renovation, manufacturing, digital talent, ESG. And the digital transformation plan, in particular, really goes to the core of the entire business. And together with the systems, we will also rethink the processes and this should really drive productivity and efficiency. So in summary, I do believe there is significant potential for growth for productivity, efficiency. It's not really about cost cutting per se. I think it's finding this type of productivity and efficiency and also maintaining the right balance between margin improvement and investments for the long term, which we really, really focused on. So that's on the first question. I think on the follow-up question around profitability. What I would say is the following. So the group has made investments in the supply chain that are really crucial for the development of our brands in the long term. And it may have impacted profitability in the short term, but we will increasingly benefit from these investments, generating also more operating leverage. That's in a general comment. Then I think we are happy with the current level of the gross margin, which is close to the 78% target that was communicated before. On OpEx, in the second semester, we don't expect a different dynamic from H1, assuming we keep growing, and that's our plan. We do see some further and higher operating leverage in the second half compared to the first half. And bottom line is, when we look at the consensus EBIT margin for 2022, that stands at 17%. In light of our H1, we think that it may be conservative. But there are also uncertainties as we said on the macro front and margin development is also a function of growth.

And last one on the product strategy and especially focusing on the leather goods. It has obviously been growing very well, but still a little bit below what the ready-to-wear category is growing. So I was wondering, you mentioned also you have a target to reach 60% of sales for leather goods. So what are your plans for this category? Are you thinking of introducing more products and also expanding your pricing architecture? Because one thing that I would -- I mean that I noticed when I go to the stores is that in terms of pricing, you're probably more at not super entry level, but compared to some of the brands that have now raised price very, very significantly. You're definitely perceived as being a little bit more affordable. And if we go into a slower market environment, typically, the more exclusive, more high-end brands tend to do better. So I was wondering what's your thinking on the leather goods portfolio and what you see as the ideal price point for the product brand?

This is Patrizio Bertelli speaking again. So yes, we did work on leather goods because we want to grow it up to 60%, which means, of course, we'll have to introduce new products. However, we have raised the floor for the whole product category of leather goods. At the same time, we always wanted to keep some entry price points. But the growth we have recorded so far is not just thanks to the increase of prices, but also we increased the amount of products sold. So we raised prices and we raised quantities sold. So this is really important. We are busy working to improve that even further. I think today, we stand at 51% of leather goods sold over the total product sales, we want to go up to 60%. So this is quite demanding, which doesn't necessarily mean that we will actually steal market share away from where ready-to-wear and footwear will keep growing, too. So we want to grow the overall group results. So of course, if leather goods become 60% of everything we sold, you just do your math and understand immediately where we want to get in terms of total revenues in 2026.

The next question come from the line of Silky Agarwal from Citi.

I have 2 questions, please. I'll start with the first one and then come back for the second. Firstly, on your production in Italy, I want to understand how much of your production is currently based out of Italy. And related to that, how much gas are you using in your production process? Do you feel that at some point, the fashion industry, including Prada, need to rethink about production to reduce the gas consumption as part of the deferred to rationalize gas? That's my first question. And do you feel that at some point, the fashion industry, including Prada, need to rethink about production to reduce the gas consumption as part of the deferred to rationalize gas? That's my first question.

Again, Bertelli speaking. Our production is more and more made in Italy. By this, I mean the very few things that we have manufactured outside of Italy is semi-finished products. But 90% of our production is in Italy, except for a few things, as we've explained very many times, such as special processing of certain items cannot be manufactured in Italy because they -- I mean we don't have specialized people. And then the second question was about gas -- if I'm not mistaken, well, this doesn't have any impact at all. Obviously, we'll pay more in electricity because electricity is increasing in price. But gas, I mean, the incidence, the most negative incident we got doesn't come from gas, but maybe from oil. And it's because of transportation costs have increased. But that for electricity, the incidents will be, say, between 25%, 30% more, we will have to spend on electricity. But anyway, your question about production, we do luxury. It's made in Italy, we invest in Italian plants. And therefore, this is absolutely strategic made in Italy.

And my second question is -- I'm sorry, I have another question on pricing. So can you just recap on what are the pricing actions you've taken so far? And how do you feel about the price -- existing price gaps currently you have between different markets with tourism picking up in Europe, do you think you need to readjust prices across geographies to balance the price cap architecture? And longer term, I want to understand in terms of how do you think the aggressive pricing that's been ongoing on the industry is sustainable? I know some of it has been done to offset the inflationary environment, but is there a limit to pricing in luxury?

Andrea Bonini again. So on pricing, when we look at our stores, we have a very -- in terms of the evolution of prices and average price. I mean, we have a very healthy balance in our stores in the semester of average price growth and volumes. And average price growth is price increases, but it's also the mix. We do believe we have pricing power. But for the second half, I mean, we'll monitor market conditions and respond appropriately. As to the regional pricing, potential distortion also created by FX, FX fluctuate a lot. So we constantly monitor, but we don't rush anymore.

The next question comes from the line of Flavio Cereda from Jefferies.

I have 2 quick questions. I'll ask them one at a time. My first question was going to pick up on the question that's just been asked on pricing. And specifically, if you forget FX for a second, your target pricing architecture, and I'm particularly interested, prices in Italy, benchmark against prices in China, benchmark against prices in the U.S. What is your -- what is the comfortable price architecture for you at this moment in time? Forget the FX distortion, but what would be your normal target here?

This is Patrizio Bertelli speaking. This is a very interesting question at any given time, but let me simply think about one thing. When we prepare prices, we don't prepare an architecture and then convert them for exchange rates or whatever. We actually look at the market in individual markets, and we see what level of price would be correct for those clients in those markets. So it's not necessarily said they are connected to one another in different markets. It's just a different approach. It's a Prada-style approach so to speak. But it's much closer to the individual situation on the individual single markets.

And my second question, if I may, was again related to a question that was asked earlier about your store refurbishment and the new store openings. And I appreciate you've given us a number there. Can I ask you specifically for store refurbishments and openings in second half of the year and potentially for 2023 as well? Are you focusing on a particular area? Or is this a global approach?

This is Patrizio Bertelli speaking again. So we did prepare a store renovation plan and hopefully, we'll be able to renovate them all by the end of 2023. And for this year, we are opening 12 new stores, 8 Prada 4 Miu Miu. And besides that, we are still renovating in quite a few stores, but we will stop at October 30 because we don't want to have renovation going on during the Christmas season. So it doesn't make sense to interfere with the Christmas selling season. So we'll take a break from the renovation work from November 1 till December 30 and then we will start being very busy in renovation, again, starting in January 2023.

The next question comes from the line of Louise Singlehurst from Goldman Sachs.

You must be absolutely delighted with the performance in the first half, particularly the gross margin achievement there. My question relates to the potential risks of a slowdown ahead. I think Mr. Zannoni highlighted that there are risks, but you're certainly prepared. I wonder if you can share with us the key risks that you perhaps do see, but more importantly, how better equipped the business is today to adapt and deal with any changes given the experience of prior cycles?

Hi, Louise, Andrea Bonini. I think in terms of risk, look, I think it's a very -- as we said, I mean, it's a very uncertain macro environment. And so developments in the second half and beyond. I mean we monitor China, as Mr. Bertelli said, I mean we are pretty confident that the demand will come back when restrictions will be lifted. But that's the question mark, right? I mean, how the COVID situation will develop, given also the policy. I think in the U.S., we're not that gloomy about the outlook, but there are signs and there are concerns also vis-a-vis the U.S., but we continue to see, as we said, I mean, solid growth. And frankly, also, we look at our specific situation, and we think that we have multiple opportunities to grow in the region. So it's an uncertain environment. I think what -- in terms of the levers we've got, I mean, first of all, the point I make is -- and this semester really shows that I think having a balanced regional mix, it's a key strength because we were able to more than compensate the weakness of China with growth in other areas and Russia, I mean, the impact of Russia as well. And so I think that's a significant strength having this balanced contribution from a geographic standpoint. In terms of levers, right, if we were to face a significant slowdown, yes, we have levers. I mean, we can act on OpEx. We can act on discretionary OpEx, we would be up to us to be quick and act on the cost in general. I think we look at the CapEx too but frankly, we have a strong balance sheet, and we act, as we said before, with a long-term view. So we wouldn't want to stop investing. And an important point is also that if there was a slowdown, I mean you want to be ready to capture then the reacceleration and the recovery because I think history tells that when we've seen this type of slowdown, I mean, this is a sector that historically again has been very quick in rebounding. And so we would want to be ready. Is there a follow-up question next question?

We are going to take our next question from Luca Solca from Bernstein.

I have a few. I will start with a question about retail space productivity. I wonder if you could share with us what is the current level of retail space productivity in terms of euro per square meter, and whether that is satisfying you at the moment? I'm asking this question because I thought that increasing sales per square meter would probably project you well ahead of the 20% EBIT margin target that you had shared with us at the end of 2021.

Thank you, Luca. Andrea Bonini again. So look, it's not a number that we disclose. But I think, I mean, you and other colleagues, I mean, do an excellent job ultimately in calculating that. Look, we are seeing, indeed, given the -- as I said, I mean, this growth is like-for-like. I mean, we're seeing significant improvement, right, in productivity. Are we satisfied? I mean, frankly, we're not, meaning that we think that we have much more potential. And how that translates into operating leverage into margin expansion at the moment, we're not changing our targets that we've given at the Capital Markets Day. We just said that we think we are on an accelerated track. And I want to remind again that it's not only about margin expansion. It's also balancing that margin expansion with continued investments as we -- the company has done so far for long-term sustainable growth.

And maybe a very brief question about gross margin. You mentioned a number of drivers that have brought gross margin higher. You didn't mention an improvement in full price sell-through, which I wonder. Is that at the level where you want it to be? Or was that also a contributor to the gross margin performance that you have produced this semester?

Thank you, Luca. I mean, as you know, by now, we don't discount. Are we satisfied? It's in a good place. Could we do even better? Yes. And that's the short answer.

You mentioned that you're investing for the sustainability of the business, and you mentioned operations, if I am correct. Can you elaborate a little on that investment? And what this means? Have you been investing in expanding manufacturing, logistics or what other areas at the top of your priorities at this point when it comes to this operations investment?

Thank you, Luca. I just want to make sure that we understood your question correctly. If there are sort of 2 parts in the question, meaning how we are investing in general, right? I mean supply chain manufacturing. And then the second part is it's about more specifically around ESG. So I'll address the first part, which is, yes, we continue to invest. I mean, as you can see in our CapEx, we continue to invest, expand, build them in vis-a-vis factoring or manufacturing plants. We also have, I'd say, a pipeline of small bolt-on acquisitions, I mean, to continue to expand and integrate vertically integrate. As Mr. Bertelli said, we're very focused on made in Italy. So that's the first part. And Lorenzo will add on ESG in particular.

Yes, I will add on this that on every investment that we do on the supply chain and plant, we were closing with the team, making sure that the plant and the future investment are also, let's say, future proof in terms of ESG. So we analyze deeply every single investment also from that point of view. So we're quite confident that all the things that we are doing always have by [indiscernible] ESG, [indiscernible], and we work very closely with the industry.

My last question, if I may. Online, you mentioned about strong double-digit growth of digital distribution. I wonder if you could share the level of online sales at the moment. And if we are right to understand that brand Dotcom is your overwhelming priority relative to being present on marketplaces and retailers?

This is a very good question. I would say always, as we are a direct channel company, we have 90% direct and temporaries in the overall omni-channel strategy is fundamental to have the right orchestration between every channel. For sure, there are differences between the Western world and the Chinese world, not because the consumer behavior is different. So we adapt all the strategy according also to the consumer, but the Dotcom is for us the strategic challenge.

Next question please.

We are going to take the next question from the line of Carole Madjo from Barclays.

I have 2 questions, please. The first one, I think some headlines in the press that you could be considering a secondary listing of the product group in Milan. Can you maybe just come back on this, if possible? That's the first question.

Yes, this is Paolo Zannoni. We have commented on that question quite a few times before. And given the heritage and the brand identity, the dual listing on the Milan Stock Exchange has always been an option on the table for Prada. It is still an option, but it is not a priority and no decision has been taken at this stage. I will also add, and I'm sure you realize that, that there are no precedents of a double listing between Hong Kong and Milan. And as of today, we are in no position to confirm while it has always been on the table and it is still being on the table. No decision has been made and the feasibility of it is still unclear.

And the second question, just a quick one on ESG and more specifically on material innovation. I think you mentioned that, of course, leather goods is a key source of focus and that you're partnering with some groups like deliver working group to think about new initiatives. Can you maybe talk a bit more about what you're doing at the moment? Can you share some new projects you are thinking about at the moment just we can understand what are the key focus on how to tackle the leather good material in the future?

Thank you for the question. Yes, we are working closely with all our partners, one of them and one of the most important leather working group. And at the moment, the strategy is work with all our partners to make sure, first of all, that we have a full traceability of the raw material to the whole supply chain. So let's say this is the first step, and we're working with all the partners. And for sure, we also have an outlook to the future, so the next decade and more to see how the environment will change how the behavior of the consumer will change. But let's say, for now, it's too early to say something about this. But right now, there is still a lot to be done to assistant realize the supply chain and making sure that we have the traceability and on all the raw material.

We are going to proceed with the next question from the line of Liwei Hou from CICC.

I've got 2 questions. The first one is on our fashion show in Beijing coming August. It might probably be the only fashion show basically in China this year. So I really appreciate your connection with China. And I just want to understand, is this part of a rotation of global fashion shows? Or does it mean more of a permanent tie and connection with China going forward?

This is Lorenzo. Like part of our marketing strategy, we have to make sure to reach every market and every country in the world. So for sure, China, particularly now in this moment where it's more isolated compared to other countries. We need to talk with the Chinese consumer. I'm not sure, as you are saying that it's going to be the only show or, let's say, big major event of the sector. I'm not sure about this for the end of the year. But yes, for us, strategy to stay in touch with our consumer. And for sure, China is more related to the -- Chinese consumer more is related than the others at the moment. So we need to go there.

And my second question is on -- if we look at the revenue growth by category related to where outperformed, which is a testament to the success of our design. And that also brings a lot of questions as in how long the enthusiasm for Prada were lost. So are we having any contingency plan in case the heat for Prada way off? And how do we look at this fashion risk internally?

This is Patrizio Bertelli speaking. Yes, the increase of Prada ready-to-wear is quite significant also because we have gone back to our roots. So we are back into a synthesis, which is perfectly mirroring the brand image we have in mind. So it's very likely that as we grow, the percentage of ready-to-wear will decrease next year. So even though the percentage will decrease, the absolute values are not likely to decrease. Actually, they are going to increase next year, too.

Our next question comes from the line of Paola Carboni from Equita.

I have 3 questions, starting with the first one. Can you comment on press release about current trading? You were referring in the press release, it's remaining pretty strong. Actually, I would probably expect even an acceleration compared to Q2, given the improvement in China and probably better and higher seasonally importance of tourists to Europe. So can you confirm this and elaborate a little bit on the current trading for the month of July?

Thank you, Paola. We're just going to say that it's strong. We confirm it's strong for the month of July. I think in terms of how that is shaping up, yes, we've seen some progress in Mainland China, which is indeed improving. I think as we said, I mean, we're far from being back to normal trading normal market conditions. I mean, there's still lots of restrictions and they vary from city to region, but we've seen an improvement since the reopening in June. And that is helping current trading. U.S., as also Mr. Bertelli said before, we've seen a slowdown, it's still growing double digits, but we've seen a slowdown, and we think in part is also due to tourist flows that are benefiting Europe, which continues to be really, really strong.

Well, these comments on 3-year stack adjusted to be consistent?

On a monthly 3-year stack, we're not disclosing that number at this stage we never.

Okay. So can I go ahead with the second question?

Of course.

Yes, that was about Miu Miu in particular. It seems to be back on a positive trajectory. So I was wondering if you can comment specifically on that also for the current trading and on the level of profitability, the brand has today and what would be your reasonable target consistently with the medium-term target you provided for the group?

So on Miu Miu, yes, as we see from the results, I mean, we've seen an improvement and it's back to also positive versus pre-pandemic with a plus 5, so turned positive on that 3-year stack. We see -- it's very encouraging because I mean, there's growing visibility, and that continues to augment. And look, we're also encouraged by the consistency of the trend. In terms of profitability, we said it before that it's also on a positive trend. We're not going to disclose specific targets.

And my last one is on ForEx. Can you help us modeling for the second half? Should we expect a similar impact from ForEx on gross margin based also on your hedging and on spot rates at the moment?

Sure. So we still expect a positive impact on top line, but net of hedges, therefore, a margin level, we don't expect the positive impact that we had in H1.

We are going to proceed with the next question is from the line of Mavis Hui from DBS.

Congratulations on very strong performance. I have 2 questions. First one is that we mentioned about our target leather segment to about 60% of our group revenue. So actually, is it possible to share more color with us in terms of our latest margins by product categories, please?

Thank you for your question. But I mean, it's not an information we disclose the margin by product category.

And my second question is that...

We have lost connection. We may want to move to the next question. Is there any more questions.

We have no further questions at this time. I hand back the conference to you for any closing comments.

Okay. This is Patrizio Bertelli speaking. So we can close our conference here. We can wish you all happy summer. And I hope to see again with another performance, which is just as good as this one. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect your lines.