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

Good day and thank you for standing by. Welcome to the Prada Group 2023 Third Quarter Results Presentation. [Operator Instructions] Please note that today's conference is being recorded. I would now like to turn the conference over to Mr. Andrea Bonini, CFO. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining the Prada Group's 9 Months 2023 revenue update. I'm delighted to be with you again and with me today is our group 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 in the Slide 2 of our presentation. With that, I will hand over to Andrea Guerra.

Welcome, everybody. So we have finished this first 9 months of the year with a group of solid results both in terms of brand desirability and business performance. Until when the 2 things will go together, we will be happy. For sure, this quarter was the toughest quarter for us in terms of comparison and I think that we have achieved a little bit more as well of what we were thinking to achieve considering that at the end of the 9 months for the group in the 2 years like-for-like is 51%. So it really means that whatever happened, we have been able to trail our journey without bumps. What is good about all this period is how well received were both our shows; Miu Miu on 1 side and Prada on the other side in September, October; really reflecting a strong brand and creative momentum on both sides. All the regions of the world have shown growth, most of them double-digit growth; Japan, Asia Pacific, Europe doing more than average for all quarters. I would highlight Europe again with almost high single digit in Q3, again against probably one of the best quarter ever a year-ago. Good growth of the Chinese cluster on the comparison to 2022, but also in acceleration comparing to 2021 so a 2-year stack with a visible growth of Chinese traveler transactions. North American cluster is just a few drops down. But on the 2 years, I would have always to remember that is plus 57%. Moving to Prada specifically. I would say that if we look it on a 2-year like-for-like, which is the measurement that I always prefer to look at, basically the rhythm in Q3 was similar to all our quarters. And if we compare only full price retail, Prada was basically double digit, very close to be double digit as well in this quarter. We could have been -- maybe we have been a little bit soft on inventory for a period of 3, 4 weeks and probably we could have done a better job, but I mean you're never perfect. We have been living all this period celebrating and reinterpreting Prada's codes and cultural identity. Shows very well received. And again Prada was put as the cultural natural carver of the industry. And last season -- this past season really we have been going through a very strong season supported by a lovely artistic cultural campaign, In Conversation With a Flower. Many things have happened for Prada in the business, in the geographies, with the products, with events, with the Prada Mode events, with the launch of the beauty category great response and the announcement of the partnership with Axiom on lunar space suits. So all of these things is only to give you an idea of the great health of the brand. If we move to the different page, which is Miu Miu, again another quarter. In the 9 months it's basically a plus 50% on last year and it's complicated when you have such a performance to go and highlight specific items or specific things which have been successful. Brand desirability, a range of great activities and events, great products momentum and team is doing great. Obviously when you're doing this kind of performance is the time when you have to be humble, no complacencies and keep your journey straightforward. I think that these are the main remarks on the group, main remarks on Prada, main remarks on Miu Miu. And please, Andrea, take it from here.

Thank you, Andrea. Starting with net revenues by channel. Total, the group recorded net revenues of EUR 3.344 billion in the first 9 months of the year, up 17% against the same period last year at constant FX. This was driven by high quality retail growth throughout the period with a positive contribution from both average price and full price volumes. In the third quarter, retail sales were up by a solid 10% notwithstanding the toughest basis of comparison of the year. On wholesale, we kept our approach selective with independents while we continue to see sustained growth in the DFS channel. Royalties, the business delivered strong growth of 67% in Q3 continuing to enjoy strong demand for both eyewear and fragrances. Exchange rates had a negative impact on group revenue of around 4 percentage points during the first 9 months. Turning to the next slide, Retail Sales by Brand. Prada delivered plus 13% growth in the 9 months driven by full price like-for-like sales. Q3 at plus 5% continued to show a positive performance with a more moderate, but solid pace compared to H1 due to the very challenging basis of comparison particularly in Europe. Miu Miu delivers outstanding growth in the 9 months at plus 49%, including in Q3 plus 48%, well spread across regions and categories. The brand contribution on group retail sales increased to 15% against 12% in the same period of last year. Moving to the next slide, Retail Sales by Geography. Asia Pacific progressed well over the first 9 months at plus 21% on a volatile basis of comparison as 2022 saw significant disruption in Q2 and Q4. Growth continued to be double digit in Q3 despite tougher comps with Hong Kong and Macau continuing to deliver the highest. Europe grew by plus 17% in the 9 months supported by healthy local demand and high level of tourism. Q3 performance remained positive year-on-year at plus 6% with solid underlying demand albeit moderated on very challenging comps as expected. In the Americas, we ended the 9 months substantially flat with a mild sequential improvement in Q3 versus Q2. Japan continued to deliver outstanding growth with plus 42% in Q3 benefiting from strong local demand and increasing tourist flows. And lastly, the Middle East also delivered a solid performance at plus 12% in the 9 months albeit in slight moderation in the last quarter. Moving to retail sales by product. All product categories maintained growth in the third quarter with ready-to-wear continuing to lead at plus 25% in Q3 and plus 32% in the 9 months. So very, very strong reception of the collections that continues. Leather goods was up plus 1% in Q3 and plus 8% in the 9 months and we continue to focus on icons building on the success of Galleria's campaign at Prada and on Wander and Arcadie at Miu Miu, but also [ newness ]. Lastly, footwear delivered plus 10% in Q3 and plus 16% in the 9 months with broad-based growth across formal, sneaker and lifestyle collections. And with that, I will hand back to Andrea Guerra for some closing remarks.

Gracias, Andrea. So as I said at the beginning, we're happy about this 9 months and I could also add October as a month that made us happy so we can talk about the last 10 months of the year. For sure, our toughest period to comp against is going -- has gone. And I could say obviously or eventually or now again we had another period of turbulent tensions and we have seen some weakness, some up and downs. And therefore, everything has to be better executed, we have to be more focused, precise in all our activities. We are entering a super period of holidays obviously in front of a kind of macro geopolitical new situation. So we have to move on, continue to invest. We need to keep on investing and keep on putting break after break in our retail excellence journey. Numbers, you are seeing is basically, I would say, almost 100% like-for-like and I would say it's even more than what we see because the great performance is driven by the full price stores. So this is for Prada and this is for Miu Miu: working on quality of people, working on training, working on motivations, working on routines, working on KPIs, working on those things that make our clientele, our consumers happy. Now we're all moving towards a very important holiday season or better it's basically starting as we talk and we will continue to perform and we will continue to perform above industry average. So obviously we are today beginning to plan 2024 and we are really hoping to conclude another solid year 2023. With this, thank you and we are now ready for some Q&A. Thank you.

[Operator Instructions] Our first question comes from the line of Susy Tibaldi from UBS.

I have 2. I'll start with the first one. So you very helpfully shared that also October, you're very happy with the start of Q4. Can you comment if there has been any specific change in trends by nationality versus what you said related to Q3 and especially interested to hear your assessment of the European consumers as it seems that these are seeing the biggest pressure in terms of luxury demand? So is this something that could be a potential source of concern going into Q4 and into next year? That's my first question.

So when you look to fourth quarter, October is meaningless because obviously November and December are more important. Looking to European cluster, I have to say that obviously compared to some quarters ago, we are in a more normal period. But yet today, our Q3 has been really, really solid in Q3 as well. So we have not seen basic differences. I would say that things have turned to be a little bit normal compared to what we have seen in the 2 or 3 years before. What I can add is that for sure in some cities of the world in the past weeks, you have seen a little bit more tension driven by macro geopolitical happenings. But I would say that so far, we have not seen basic differences.

Okay. My second question is on Miu Miu, which performance outstanding. First of all, is this quite broad based or is it driven mostly by Asia? And what's interesting to know is what are the implications for profitability? Because this brand I remember used to be a very huge drag on your profits. So what's the gap now versus Prada and is it narrowing or is this remaining bigger because you're investing more in Miu Miu?

So let me answer to the first part. I mean when you're doing plus 50%, cannot be a region, cannot be a product, cannot be a customer. It's a brand which is in good health. It's a brand that is positioned where the consumer is today and I think that design and style is well interpreting this attitude and the team is doing a great job. So I would put it like this. Obviously we have room to continue to improve. We're not at the forehead of everything, we are catching up and we still have a journey to go. Andrea, if you want to add any kind of other comment on profitability.

On profitability, Miu Miu was already on a very positive trajectory last year and it remains and even accelerates the trajectory this year. The gap is narrowing. So Prada as of today remains ahead in terms of brand EBIT margin, but the gap is narrowing. So it's a very, very -- considering the like-for-like performance of the year is a very, very positive step forward for Miu Miu. Also you have to consider that if you look at the average size of a Miu Miu store is smaller than a Prada store and so productivity gets very interesting.

And just a quick follow-up. Pricing-wise, you commented in the past about the price increases at the Prada brand. Miu Miu, has it seen similar level of price increases or has it been a bit bigger?

I would say similar.

Our next question comes from the line of Erwan Rambourg from HSBC.

Congratulations. I think you've commented to the press that you were looking to deliver above market growth. I'm just wondering if you're comfortable where the consensus stands for the full year and if this implies that you can potentially deliver double-digit growth for next year? And just going back to that pricing question, what role would pricing have for 2024? I know some brands might have gone a bit too high too quickly and now they're paying the price with the aspirational consumer being disconnected. How do you think about the pricing part of the equation for next year's growth?

So on the consensus, we're not going to comment in general specifically. And by the way if I had to say, I mean uncertainty over the past 2, 3 weeks has certainly increased rather than decreased I mean from a geopolitical macro standpoint. Having said that, I can only reiterate what Andrea said that we feel we are well positioned to meet our ambition to deliver the above market growth for the year and for next year and let Andrea comment, but I think it's early other than saying that we should probably retain that objective to continue to deliver solid growth.

I mean I would not add much more in terms of pricing. I think that in terms of pricing, we are going to have a constant and clean maintenance of our pricing levels. So I would say that during 2023, we have gone with Miu Miu and Prada with more or less between 4% and 6% differences on regional basis and most probably we're going to have something similar next year.

Our next question comes from the line of Edouard Aubin from Morgan Stanley.

Just before asking the question, just 1 clarification, please. You talked about October starting well and you said it's not a very significant quarter for you, but at least it gives us some indication. So you're talking on a 2-year stack, October no change really versus Q3 basically. That's the way we should understand your remarks?

Yes.

Okay. Understood. And then second question is on the leather goods. You kind of have a stated objective, I don't know if you agree with the word stated, of increasing your share of leather goods to potentially 60% over time, I know there is no set date. But we see year-to-date actually a decrease in the mix. I mean part of it is because you're doing so well in ready-to-wear and I guess at Miu Miu as well. But are you happy with the progress you're making kind of developing your pillars? You mentioned Galleria; I think you made a push over the summer, you had good press coverage. But looking at social media trends, it doesn't seem that there is a big pickup, but maybe I'm looking at the wrong data set. So just any comment on progress in leather goods and developing the pillar would be interesting?

Yes, obviously. So I would position my answer in 2 ways. The first is Q3 was highly, highly more complicated on Prada leather goods than anything else. I always would love to remember and remind everyone that in 2022, '21 and '20; leather goods market have had an unbelievable dimensional increase just thinking about testing and trying on products. That was the easiest to be bought in periods of social distancing. And most probably nowadays even looking to some more macro numbers and some competition numbers, I would say that leather goods is a little bit taking a kind of breath. So looking to the comparison, looking to the world where we are today, we're happy. Could have we done better? Always, no doubt. So I think leather goods is one of the best results of the quarter, but we could have done for sure a better job and we will continue to work on that. In terms of iconization, managing the mix between leather, it's moving on. So nothing is decelerating. I think we have a strong portfolio of products going forward and we will continue to work.

Got it. And then last question, Andrea. In the past few months, you reminded us that Prada would remain in investment mode in the short to medium term. Clearly you want to continue to grow your brand desirability, you want to invest behind the brand and keep A&P level at a high level. I assume obviously there is no real change there. But are you seeing the cost to compete changing given maybe a slightly more muted demand for the sector overall or most of your peers and competitors are still spending and I guess, therefore, forcing you to keep a high level of spending behind the brand?

I'll take it, Andrea Bonini, if it was for me, Edouard. But no, I'd say look, I mean they're not forcing us. I think we do remain in a very willing investment mode in the sense that, yes, there may be a progressive normalization. But ultimately when we look ahead, I mean we look at the potential of the brands and we look at the long-term margin upside and we do believe that is unchanged. So overall, and this is not a short-term thing, this is not the last 3 or 6 months or 12 months. I mean I do believe that the cost to compete in the sector overall has progressively increased, but there's no change, frankly, on that over the past few weeks or months. In light of the tragic developments also of the past few weeks in the Middle East, in light of the uncertainties of the macro, we have to continue to be very vigilant and reactive and ready to react. But our attitude if we think about 2024 has not changed, we remain willing to invest and invest progressively more.

Our next question comes from the line of Thomas Chauvet from Citi Research.

I have 2 questions, please. The first one on wholesale, which turned slightly negative in Q3. You said, Andrea, controlled evolution of wholesale. Could you separate the impact of your own cleanup initiatives from comments about the underlying trends you're seeing in the channel so department stores, travel retail and online third-party platforms? We've seen particular weakness online in third quarter for the industry? That's my first question.

On wholesale, well, I mean as you know, I think first of all, also on a quarterly basis there's an impact on deliveries and so on. But if you look at the performance over the 9 months and for the year what we expect, yes, you need to really divide between the DFS business which is growing almost triple digits on 2022 because it was severely affected by COVID disruptions and so on and then the independent wholesale, which if I look at the performance for the 9 months is low to mid-single digit down. But again consider it the work of, call it, rationalization, cleanup and so on completely largely done on our side. We can't really -- given the size of our independent wholesale business as of today, we're not really in a position to comment on those trends because the reality is we voluntarily constrained the growth of it. And so as far as we are concerned, we're not really affected by those dynamics, which as you I mean as an observer of the market, we do obviously see and yes, and that's it.

And my second question on royalties, which continued to grow at a very high pace. They will likely be EUR 100 million of revenues this year I think for the first time ever. Given it's almost pure profit, that would be close to 10% of group EBIT. So I'm sure you start to think this is quite a relevant business for the group. Can you comment a bit on your initiatives with L'Oreal and with EssilorLuxottica to grow these license further? And whether you think of other categories that could be subject to licensing and also what's the rough split between beauty and eyewear in terms of revenue this year?

So for sure, we are not thinking to any other categories to be licensed. Eyewear is a super business since ever and it's continued to be. I think that the success of a number of styles of Prada during last summer were very visible in all resorts of the world. So I think the success is visible. There is no secret about it and the relationship with Luxottica is today pretty good. On the other side, we are just at the beginning. We are really at the start-up phase. We are basically, what is it, 12, 15 months through the journey. We have just launched the beauty and cosmetics. So I think that the journey will be on this side incredibly long and hopefully in the next 2, 3 years we will continue to see great growth and then a little bit more normalization. But it's a channel where visibility is almost everything and today Prada is not yet really visible. But the plans together with L'Oreal are fantastic and very clear and we will see popping up Prada here and there in the world in the main places, in the main department stores, in the main travel retail.

And so eyewear is the largest part of that revenue pool? Can you give the split roughly between eyewear and beauty?

I mean if you go back 2 years, it was all eyewear and today it's a little bit more balanced.

Our next question comes from the line of Luca Solca from Bernstein.

Maybe a clarification question about growth drivers to start with. You were mentioning 4% to 6% contribution to growth from like-for-like pricing and price inflation. I wonder what mix contributed and what was the contribution from volume if you look at year-to-date sales growth?

I would say if we take mix and price on 1 side and volume on the other side, 50-50 on all main categories I would say, which I think is always a parameter of good health. I think we had a good quality increase as well this year.

And maybe getting deeper into pricing and price mix. There seems to be some feedback from multibrand retailers of consumers potentially putting the foot on the brake as far as price increases are concerned. So I was just wondering relative to your collection structure, are you well equipped to possibly take care of consumers being more cautious as far as their purchases are concerned. This seems to be the shape of things to come especially in the uncertainty that is possibly going to characterize '24. Do you maintain a strong entry price assortment in all product categories so that you can potentially capture consumers going for lower priced products?