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

Good day, and welcome to the Prada Group Q1 '23 Revenue Conference call. Today's call is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Andrea Bonini, CFO. Please go ahead.

Good afternoon, everyone, and thank you for joining the Prada Group's first quarter 2023 revenue update. I'm delighted to be with you again. And with me today is our group's CEO, Andrea Guerra. We will start with some opening remarks and then move to Q&A. Before we start, please be reminded that during today's call we may discuss forward-looking statements which are subject to risks, uncertainties and factors beyond our control. And the actual outcome and returns may differ materially from such statements. Please refer to the disclaimer included on Slide 2 of our presentation. And with that, I will hand over to Andrea Guerra.

Gracias, Andrea. Hello to everyone. Welcome back to all of you. I will start with an update on business performance and work done in Q1 and current trading. So by definition, we had a solid start of this year. And psychologically and operationally, it's always good to have a strong first part of the year. And what is also fair to say is that we had an acceleration during this first months. So we are happy. And we are also happy about our April numbers that has just finished. The performance has been supported by a constant high desirability and strong momentum of Prada on one side and Miu Miu on the other side. We will focus and dedicate our time, our efforts, our investments in nurturing the desirability of our brands. This was, is and will remain our main focus. We're happy to report you that our growth has been basically like-for-like. So the growth of 23% is a like-for-like growth. When you grow like-for-like, and I will say that this is probably the third quarter in a row or fourth quarter in a row of a constant like-for-like growth. This means discipline, routines, proper use of all CRM toolings, clienteling, retail activities, everything. That really is again, like desirability, the other big effort of our work in order really to build a stronger retail excellence platform. It'll be a long journey. We had a well-balanced growth through the regions. As you all know, Asia-Pacific has been leading the path with a significant rebound in China, starting not great at the beginning of January, accelerating during the celebrations of the New Year and constantly accelerating up to, I would say, Golden Week of during last days with at the beginning a strong rebound in internal tourism, then the opening of Hong Kong and Macau and sometimes reporting a 3-digit growth in those 2 cities. And during the last weeks, we see a real rebound in most of Asia region. And we are also seeing some, some, I would yet call some, little bit of rebound in Europe as well by Chinese consumers. But if I have to give an opinion, we are expecting a stronger rebound in second half of the year by Asian and Chinese consumers in Europe. In Japan, a really strong growth. And I think that this is really due to the big work of Prada Miu Miu during the last 24 months. And Europe continues also during the spring. And if you remember a year ago, we had a quite an acceleration in Europe during this month. So being able to really welcome during spring, I think allows us to think positively about the remaining seasons in Europe. The Americas continue to grow moderately. I would say that we're happy to say that Q1 was similar to Q4, yet mid-single-digit positive. Obviously comping and coming from a 12 and 24 months of very, very high comparable. So I think that it's fair to say today that the structural dimension of luxury in fashion American market is today bigger. And I would consider this as a period of stabilization. If we look to Prada in details, I would say that Prada today is very, very desirable. Shows have been very successful. A number of products and marketing activations had good acceptance throughout the world. This natural positioning of Prada being able to be very agile between drops and novelties on one side and constant and patient development of iconic products is really paying off really well. We have kept building momentum behind the launch of Eternal Gold. Eternal Gold fine jewelry collection to me is very important as a single product category. But on the other side allowed us to really begin journeying a number of dedicated events where we had the opportunity and really a new opportunity to meet and spend qualitative time with our best clients throughout the world and to experience the best of Prada. This is, I think, something new for us. And I think that this will be very important going forward. On the other side, it's good to really being able today to talk a little bit also about Miu Miu. The team has done a great job. I think that Miu Miu is really coming from a 12, 24, 36 months of really hard work. And we are seeing the benefit of this. Miu Miu is really positioned in what it is today. It's naturally and instinctively very contemporary and very actual brand. The fashion shows and the continued collaboration with women artists are particularly well-received. And I would say that this brand success has now turned to be visible in a much bigger retail success. The number of people crossing the door, the number of people converting to Miu Miu, the number of people coming back after 1, 2, 3 months and repurchasing Miu Miu I think are important signs for our future. So Miu Miu has always had a very iconic presence here, Ready-to-Wear and shoes. And I think that what is also positive about this last periods is that we are really seeing a traction in the fundamental Leather Goods sector. It's a long journey. And we're really happy to be able to build and nurture another very strong pillar to the group. I think that I have given you a journey through our, this first 3 months, as I said. And I would repeat April was a continuation of this progress. And then we give back the word to Andrea to talk through our revenues in more details.

Thank you, Andrea. Starting with net revenues by channel. In total, the group recorded net revenues of EUR 1.065 billion, up 22% versus the same period of last year at constant FX. Exchange rates had a negative impact on group revenue of 60 basis points during the period. The first quarter saw an acceleration versus Q4 last year with retail sales up 23% against the same period of 2022 at constant FX. Growth was healthy, driven by like-for-like and full price sales with positive contributions from both average price and full price volumes. On royalties, the business delivered strong growth of 52%, continuing to enjoy strong demand for both eyewear and fragrances. Turning to the next slide. Retail sales by brand. Both Prada and Miu Miu registered robust performances in the first quarter with a sequential acceleration in retail sales compared to the previous quarter. Prada grew by 21% at constant FX with double digit growth across all product categories, including an excellent performance in men's collections. And Miu Miu delivered a standout performance in the first quarter, up 42% at constant FX. In terms of areas of strength, growth was very broad-based, but we would call out Asia Pacific and Europe for particularly strong growth. And we were also very pleased to see robust performance in Leather Goods. Moving to the next slide, retail sales by geography. Retail sales growth was well-balanced across geographies and supported by a strong rebound in the Asia-Pacific region, with China benefiting from the easing of COVID 19 restrictions. Asia Pacific grew by 22% at cost at constant FX versus the same period of last year. Thanks to the acceleration in mainland China, but also notably in Hong Kong, Macau, we continued strength in Southeast Asia. Europe continued to experience a solid double- digit growth, up 28% at constant FX, supported by both domestic and tourist spending. Southern Europe in particular continued to drive growth. In the Americas, we continued to see moderate growth in the first quarter, up 5% versus the same period of last year against more challenging comps as Andrea said and after a prolonged period of growth. Nonetheless, the North American cluster continued to register double-digit growth. We continue to see accelerated growth in Japan, plus 55% at constant FX, benefiting from the recent retail investments we've made in the country, as well as sustained local consumption. Impact of tourism was still fairly modest in the quarter, but it's increasing. Lastly, the Middle East was up 15% in the first quarter, still solid but softer in terms of transaction with locals. Turning to retail sales by product. All of our product categories maintained strong double-digit growth the first quarter. And in particular, Ready-to-Wear grew 38% at cost and FX and remained the fastest-growing category for the group. Leather Goods registered another solid performance, up 14% at constant FX, supported by a combination of new and iconic lines. And lastly, thanks to the performance of both formal and lifestyle collections, Footwear delivered 20% growth in the first quarter. With that, I will hand back to Andrea Guerra for some closing remarks.

Gracias, Andrea. It's fun that Andrea is giving the word to Andrea and back to Andrea. So just to wrap up. First of all, obviously we are very well aware that we live in a world and years where the rule is uncertainty. So we know that and we are trying to be every day more agile and quicker to be able to react to anything else. So we are in a position today to accelerate investments, obviously, if conditions remain supportive. And investments, I mean brand communication, I mean store refurbishment, store -- really creation of new platforms in terms of store designs and store experience. So we will continue to work hard on mainly 3 things. Our brands, their long-term positionings, their identity, and making sure that desirability remains top. Our people, motivation, training, ability to really craft organizations, to be, I think, more agile and more contemporary, and in which each individual can really boost their contribution. Third, retail excellence. Retail productivity remain key drivers of growth yesterday, today and tomorrow, and in the medium term. This last I think will really being a obvious character of what we will do in the next periods and months and years. Thank you for your attention. And now we move to the Q&A session. Thank you.

[Operator Instructions] Your first question comes from the line of Edouard Aubin with Morgan Stanley.

So 3 questions for me, please. The first one is, so your 22% gross in Q1, could you, please, sorry, provide some color on kind of the breakdown between pricing, mix and volume, either at the group or maybe might be easier at the Prada brand level. That would be really helpful. Andrea, you talked about the acceleration of Miu Miu which indeed is really quite impressive. And you talk about contemporary resonating and Leather Goods and all of that. But could you please elaborate a little bit more on kind of what's driving this impressive? And particularly, are you experiencing a change in your, gradual change in your customer profile at Miu Miu. And to finish on Miu Miu, if I'm not mistaken, I think the sales density is about a third lower than that of Prada. Do you see any structural reason for Miu Miu to have lower sales density? And last one, I promise, in terms of, I know it's early in the year, but when you look at consensus expectation for the year, the full year, I think consensus around 17% retail organic sales growth and maybe with margin of about 21.3, if you could comment on how you feel about these expectations, that would be helpful.

Hi, Edouard. Andrea Bonini. I'll start with the first one. I mean, we're not going to give the exact figures, but as I referenced, we had positive contribution both in terms of average price and full price volumes. And that makes us satisfied because that's indeed, I mean, what we want. In terms of average price. I mean, what I would add is that as average price, I mean, we have 3 components. The fact, I mean, the first one is the run rating of the price increases of last year. I mean, the second one is the mix. And the third component is very marginal so far this year, which is more recent price increases. And that's about it. I will pass it to Andrea for the second one.

Yes. In terms of Miu Miu, I think that the broader team of Miu Miu has really worked extensively in basically 2 things. First of all, being very clear on the brand positioning. And I think that this has been cleaned and cleared during the past 2, 3 years. Second, I think based on this, we have repositioned also collections and products. This brand is well-positioned on last generations is a younger audience compared to the other brand and is enjoying quite a successful community-based experience. So I would say, very actual positioning has always been Ready-to-Wear, has always been shoes. And I think that the addition of Leather Goods success can really build this other pillar. In terms of sales density, I mean, I would never compare -- I mean it's not Prada the benchmark. I think Miu Miu is working as any other luxury and fashion brands in the world. And the density we have today is pretty low compared to where we ought to be. So I think that, again, like for -- this is more than like-for-like because the growth of Miu Miu is that kind of growth with yet store closures yet in the cleaning of some mistakes done in the past. So I think that the acceleration is visible and hopefully we are able to fuel it. In terms of consensus, let me say, we are just at the beginning of the year. Again, I would repeat the fact that this is the century and these are the years where everything can happen every moment. So we know that we have had good growth in the past 3, 12 and 24 months. And hopefully, we're able to move this in the long term. Obviously we have an ambition to deliver to the market growth, which is above average. This is what we have to do, and this is what we will keep on time to do.

Your next question comes from the line of Thomas Chauvet with Citi.

I have 3 questions. The first one on wholesale. Could you comment on the performance of the traditional wholesale in U.S. and Europe as well as Asia travel retail and how the wholesale order books looks like? Secondly, a question on the product mix and Leather Goods, which have underperformed quite a bit this quarter. I think it was already the case in the second half last year. But now, if I'm not mistaken, Ready-to-Wear and Footwear combined or for the first time larger than Leather Goods. Can you comment on why you think you're not yet enjoying the same growth in such an iconic product category like Leather Goods, particularly given the pricing impact and what are the key initiatives on product and marketing that you're taking? And finally, on the other brands, mainly Church's and Car Shoe, they've become obviously quite small in group context after several years of mixed performance. Any rationale for keeping this in-house? And can you remind us the benefit from the North Hampton factory of Church to the rest of the group. We were lucky to visit this factory, I think, 6, 7 years ago. How does this factory still benefit perhaps the greater Prada Footwear business that you have?

So in terms of the first, I would say that department stores, I would say, are enjoined in this journey of Prada and Miu Miu. We had a good order book. We are a little bit late on some delivery. But that, I would say, is not an issue at all. And on the other side, we are obviously cutting the landscape of independent wholesale across the world. And I think that this is really given to the numbers that we have been able to achieve a little bit of another solid step. In terms of travel retail in Asia, you can imagine what kind of growth we could have seen in many of these travel places in Asia nowadays. It's one of those cases where we have also seen in some weeks, some triple-digit growth. But obviously, we were comparing to some figures that were sometimes very close to 0. In terms of product mix, I would say we're happy. This is the first answer I would give you. We are growing. And I think that we had also an acceleration during this quarter compared to the quarters below before. And I think that this is one of the cases where we have done better than the market. So obviously, nowadays, there is this image Ready-to-Wear success of Prada, but Leather Goods is a iconic, symbolic part of our business, of our history and about our future. In terms of Church's, I mean we will dedicate some times to talk about Church's in the next, let me say, probably 2 or 3 quarters. We're working hard. We're doing our homeworks. I think there is a lot of work to be done, and we're all aware of it in terms of brand, product positioning, stores, people motivation. And I think that we are trying to do all of this, will take time. But I think Church is an important addition to our brand portfolio. It's a valuable brand, will never be a volume brand. But I think that there is an opportunity to really enjoy life with Church in the mid-long term.

Your next question comes from the line of Charles-Louis Scotti with Kepler Cheuvreux.

I have 3. The first one, you said that the Q1 growth was primarily like-for-like. Can you remind us what should we expect in terms of stores opening this year? And would you consider streamlining your store network as part of your retail excellence strategy? Or are you happy with the current setup? And second question, your growth was pretty solid in Footwear, up 20% in Q1, whereas some of your competitors pointed out to a softening of the demand in this category, especially in the U.S. How do you expand your outperformance in Footwear? And if you could be a little bit more specific on which subcategories performed best during the quarter, it would be very helpful. And third question, more midterm, I would say you have already achieved your midterm gross margin and EBIT margin objective last year. And well, obviously, it's hard to imagine no further operating gearing this year in light of the strong top line growth. Should we expect you to release new midterm objective anytime soon? And what level of profitability would you consider as reasonably achievable in the midterm?

Thank you. So on the first question on the like-for-like and expectations in terms of space growth and volumes. And I said for the year we expect net -- I mean, we expect modest growth, very modest growth. The third question, and then I'll leave it to Andrea for the second one. I mean the third question around gross margin, I mean, first of all, these are revenue update, so we'd like to keep it to the revenue topic top line. But what I'd say is, I mean, nothing different from what we said at the full year in the sense that we've achieved, yes, the objectives that were given at the Capital Markets Day. And going forward, at the gross margin level, I mean what we expect in terms of expansion is modest, more modest considering where we are. And that EBIT margin level, if we deliver top line in line with our targets, with our objectives, I mean, we have certainly operating leverage. We're keen to reinvest in the business, but we should also be able to continue to deliver margin expansion. And I'll pass it to Andrea for the second point.

So what is good to report about this solid start and solid growth in Ready-to-Wear and Footwear is that it was pretty across the board through categories and through regions. I would only highlight one thing that men Ready-to-Wear was probably something to highlight in terms of obviously men is Prada in terms of success. Always keep in mind that what I was saying at the beginning, I think, is helping Prada in a very different world scenarios. Prada has this very natural positioning on being able to deliver products to the highest luxury part of the market, but also to a more lifestyle world. And I think that the natural dance and movement between this world is allowing Prada to really go through every kind of season. So I would notice 2 points on one side man on the other side Prada's positioning. Next question, please.