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

Good day and thank you for standing by. Welcome to the Prada Group Q1 2024 Revenue Update Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Mr. Andrea Bonini, CFO. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining the Prada Group's First Quarter 2024 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 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 disclaimers included on Slide 2 of our presentation. And with that, I will hand over to Andrea Guerra.

Good afternoon. So as already we said during our last conferences and meetings, we think that 2024 as it was the second half of 2023, this is a period that in which we will observe a different kind of market, a different kind of trends compared to past years. This is a period in which sharpness of brand positioning, brand visibility, strong creativity will mark differences. As Prada Group, we had a positive start to 2024, with the total group retail growth of 18%, basically like-for-like. Group growth was really balanced through product categories and geographies. On one side, Prada brand has grown 7% on top of the fastest quarter of 2023. All product categories were positive, all geographies were positive. Brand-wise, we maintain strong desirability and Prada is holding and building on his role of industry cultural shaper. Expanding from the fashion shows, to Fondazione Prada and arts, and in 2024, especially to sports and Luna Rossa. So Prada is playing and is shaping the future in a mutual cultural aspect. On the other side, Miu Miu is on a strong growth trajectory with a plus 89% on Q1 2023. Very well balanced on geographies. And I would comment saying that Miu Miu is getting back its natural position in this industry. And the journey must be still very long. We will continue to work hard, humbly to invest for a continued solid growth in future periods. And the brand is today much more balanced in terms of product categories compared to a year ago only with a very correct and strong growth on leather goods with new product families, which had great traction and a much better coverage of all our consumer dreams regarding leather goods. Please, Andrea give us some more detailed revenue analysis.

Thank you, Andrea. Starting with revenues by channel. In total, the group recorded net revenues of EUR 1.187 billion in the first quarter of the year, up 16% at constant FX on the same period last year. Exchange rates had a negative impact on revenues of 500 basis points during the period, and the increase at current exchange rates is therefore plus 11%. Retail sales continued to be the engine of growth, up 18% at constant FX. The performance was driven by like-for-like and full price volumes at group level. On wholesale, performance was flat, and on royalties, the business delivered plus 22% in Q1, a strong performance sustained by both Eyewear and Fragrances. Turning to the next slide, retail sales by brand. Both Prada and Miu Miu reported above market growth in the first quarter. Prada delivered a solid plus 7% against high quarterly comps and growth was driven again by like-for-like and full price sales and was supported by all categories and genders. Miu Miu continued on its strong growth trajectory with plus 89% at constant FX. And growth, as Andreas said, was widespread across all categories and regions. The brand contribution to the group retail sales increased to 22% versus 15% in fiscal year '23. Moving to Slide 9, retail sales by geography. The group achieved double-digit growth across all regions, except Americas, which also saw further improvement versus Q4 last year. Asia Pacific continued to see solid double-digit growth at plus 16% constant FX against the basis of comparison marked by the lifting of pandemic restrictions in Greater China. Europe was up 18% at constant FX, also on a challenging basis of comparison, supported by both domestic and tourist spending. The Americas, as I mentioned, were up 5% versus last year, aligned mainly on local spending. Japan reconfirmed as the best performing region in the first quarter at plus 46%, with growth sustained strong local demand and increasingly by tourists. And lastly, Middle East returned to double-digit growth at plus 15% in the first quarter. And with that, I will hand back to Andrea for some closing remarks.

Thank you. So as I already stated at the beginning of this conversation, we are living in a year, which is pretty different from recent years. We, as Prada Group have an opportunity, and this opportunity is clear. To continue to grow and achieve results which are above market growth. Our brands are in a positive momentum. And next to this, all the projects that we have been talking about in the last 2 or 3 years are progressing with retail execution being at a different level compared to earlier periods. And evolving our organization across the world. For sure, today, we are much closer with all our brands to all our main consumers and prospect consumers. And again, as we repeat it, it's a long journey still ahead of us. We may still work very, very hard on this. Having said this, thank you for listening to us. And if you have comments and questions, me and Andrea are available.

[Operator Instructions] And the question comes from the line of Chris Huang from UBS.

It's Chris from UBS. I have 2. Starting with the first one, just on your current trends at the retail channel. Obviously, the channel saw a very nice acceleration to 18% growth in Q1 versus Q4 at 17%, which is -- I would imagine all is expecting this level of strong growth. So maybe can you just comment a little bit more on how are you seeing the trends shape up at the first few weeks of Q2. As we've seen from other sector peers, they have been seeing some slowdown generally. So keen to hear if you are seeing any similar trends? And should I ask my second question here? So secondly, just quickly on growth by nationality. It will be very helpful to understand within this Q1, how much is the Chinese consumer is growing and how much are American and European is growing? And especially if you can kind of break down Prada versus Miu Miu, that will be superb.

So I will take your first question and I'll allow Andrea to answer your second question. Regarding current trend, and I would state a few things that are valid for our last, let me say, 6, 8 months. So this is a period where there is not a constant growth or a constant acceleration, but we are, for sure, in a period where we got accelerations and decelerations. April 2023 has been probably the largest month in percentage growth terms compared to the year before. We are observing a very similar trend in April compared to Q1. So during Q1, we had some weeks where we had, again, very good performances, others in which we had seen some slowdowns. But what is good is that we are in the observation of longer periods, we are continuing to keep up with the growth we had during 2023. Q2 has been the largest quarter last year in terms of percentage growth. So I always want to remind this. Andrea, for the second part.

On the second part, I would leave Miu Miu out of the answer because given the performance at retail level, as you can imagine, all the different clusters present very -- by nationality, present very, very good trends. We focus on Prada, similarly very pleased with Chinese up in Q1, low double-digit. Europeans positive, mid-single-digit positive in line with what we had in Q4 '23. Japanese very good growth. Korean is also positive. And North America, I would say, flattish compared to what we saw and similar to what we saw in Q4.

We are going to take our next question. And the questions come from the line of Edouard Aubin from Morgan Stanley.

Just a clarification for Andrea Guerra, sorry. Andrea, just to make sure I understood what you said for -- regarding the trends in April. If I understood correctly, you said despite the more difficult comp base, the trends in April are more or less in line with what you experienced in Q1 '24 because you've mentioned Q1 '24, but also Q1 '23. So around 18% more or less. Did I understand correctly?

Yes.

Okay. The second question is...

Obviously, more or less. Not on the...

More or less. Of course, of course. The second question is, you've highlighted over the past few quarters, obviously, your willingness to increase sales density at both of your key brands. And Prada, one of the tools to do that was to increase the sales of leather goods. You, think this time, you didn't disclose kind of the growth by product segment. Did you manage to increase the share of leather goods in the mix at Prada, or did you experience another fall as you did, I think, if my memory is correct, in Q4 in leather goods?

So let me position my answer well. So first of all, density in terms of Prada and in terms of Miu Miu is very easy to be read because basically, our growth is like-for-like. Therefore, however you look at it, that's an unbelievable density growth on both brands and all quarters. So that is a completely evolution in the way we are managing our consumers. We're managing our sales force. We're managing our potential consumers activities in and outside stores. So this is the results of all of this. In terms of leather goods, the performance of Prada in Q4 has been pretty strong. And in Q1, we again were positive. So in a world where I would say that the sluggish product category across all companies across the world would be leather goods in the last 6 months of 2023 and the beginning 3, 4 months of 2024.

Understood. So you were positive, but maybe as a percentage of the mix, it might have declined a little bit. That would be fair to assume.

No, I wouldn't put it like that.

Okay. And last question, which is kind of a longer-term question. So in terms of beauty, you signed this agreement with Laurent . So it's kind of early days. It's a relatively minor contribution today. But if we look at the long term, the Prada brand is bigger than the Saint Laurent brand into the fashion later good sales. And if I'm not mistaken, I think Saint Laurent generates more than EUR 1.5 billion of sales with the Saint Laurent kind of beauty line. So is there any reason within 5, 10 years or so for you not to be -- have a kind of [indiscernible] I'm sure you've obviously done a market study there? Or you think Saint Laurent has been in the kind of makeup lines for years, if not decades, and therefore, they have a big head start versus products. So kind of how are you sizing this opportunity for you down the road?

So, Prada is today the #1 or 2 in IES in the world. Can this happen in beauty? Probably not, but the journey is unbelievably long. And this first 2 years have been well above our expectation, but I would say even Laurent expectations. We are, I think, having a fantastic teamwork. Sometimes it's complicated to say the Laurent or the Prada because it's a nice group of people working to gather across the world and across product categories. Fragrances is really moving fast. Lunar also on the male side and Paradox on the female side are really escalating the rankings. I do not know -- I'm not expert enough. You should ask this question probably to Laurent. What is the final goal, but the ambition is total. I mean, this is not one of those activities where we're looking for money. No, we are looking for a different kind of moment, a different kind of consumer sometimes and having more people entering our brand at different price levels.

We're now going to take our next question. And the questions come from the line of Chiara Battistini from JPMorgan.

The first question is, as you mentioned, the growth is all like-for-like. So I'm assuming basically no contribution from space. And I was wondering if you could update us on your plan in terms of space both on Miu Miu and Prada for this year and next? And the second question, on your outlook statement, you mentioned that you will continue to invest across the business and leveraging the strength of the reinforced organization. So I was wondering if you could touch on the areas where you think there still need -- or there is room for further investments and where you see the further potential upside from an infrastructure point of view.

Okay. So I will take the first one and Andrea will take the second one. In terms of like-for-like, this is what, I mean, is happening during the past years. In terms of 2024, I would consider that the space enlargement, square meters enlargement is pretty marginal. 2025, I think that we will add 10%, 15% -- -10, 15 more stores for Miu Miu, and I would say, probably 5 to 10 for Prada in 2025. Andrea?

On the second question around further investments as for investments, I'd say, well, point #1, the priority, as we say, remains investing behind the brands and investing on desirability, continuing to invest to deliver the solid sustainable above-market growth that we talk about. Therefore, its marketing, its communication activities, is retail activations and events more from an infrastructure point of view. On the organization, the one area certainly where we want to continue on the path that has started is on the verticalization of the brand organizations. Miu Miu, the exceptional momentum and strength to build on the investment made in the past quarters, years, including an organization, but there's more to do to continue, as we say, to strengthen really the foundations in that regard. We continue to invest in IT. That's another big area of investment. As you know, we are still in the journey of upgrading and evolving the digital infrastructure. That's a big project that will continue to take time. And those are the key areas I would will mention in addition to retail. On the other side, as we continue to make these investments, we're also very focused, as we mentioned before, on finding efficiencies across other lines of the P&L and when it comes to G&A in particular.

We are now going to proceed with the next question. And the questions come from the line of Melania Grippo from BNP Paribas.

This is Melania Grippo from BNP Paribas. I've got 2 questions and also congratulations for your results. First is in the retail performance, if you could tell us what was the contribution from price and mix? And also, if you could please elaborate a bit on the performance in Mainland China, and what is possible, what you're currently seeing there?

On the first question, when we look at the performance at group level was predominantly driven by volumes and with reference to price mix and the same can also apply to Prada specifically. It's a very limited contribution from mix in the quarter and more from price, but there's also an element of volumes for Prada as well. So that's on the first question. Regarding China, I would answer like this. So it's very complicated to say what about China compared to the Chinese. This is a period when, finally, Chinese are traveling really abroad. We're seeing this in Japan. We're seeing this in Paris. We're saying this in Milan. We're seeing this in very different places of the world. And who is traveling today from China? I would say it's more individuals. So it's more in the upper side of Chinese consumer base, which are also not many, but also big spenders. So when it's time to travel, you feel it in China. When it's not time to travel, they're back. So we had a slow start of the month of the quarter, then we had a great period of at least 45 days. Then after Golden Week again, we had a little bit of slowdown. So it's really a little bit based on a tourism rhythm, the journey of China this year. So this is the pattern I would tell you that is going on today with the Chinese in China.

We are now going to take our next question. And the questions come from the line of Erwan Rambourg from HSBC.

Congratulations on a very impressive growth in Q1. Just staying on the Chinese cluster. I'm wondering if you could comment on if you were to take the entire quarter for the past few quarters, what do you see as being the weight of that Chinese cluster abroad versus at home? And have you seen any change in psychology of that luxury consumer recently? And then maybe secondly, I thought Europe was counterintuitively strong. And I think you mentioned that the European cluster was up mid-single digits. So can you comment on different clusters within Europe, i.e., Europeans versus Chinese tourists versus non-Chinese tourists. How have they grown and maybe what the weight of all 3 are for the European market.

So on Chinese, I think we said enough. There is more, they're spending more outside China today. Are they back to what we have seen in 2019? No. No, we're not. Probably yet there is a 20% to 30% gap to what we have seen in 2019. But finally, I mean, a year ago, we were saying maybe this quarter, maybe next quarter, maybe the quarter after. This time has arrived. And at the end, it's the same people spending money. So abroad for sure, they are spending. They're doing what they love to do, and they're doing it especially in Japan today for a number of reasons, but also in Europe. Regarding European market, the real -- what we can say is the following. Locals are doing good. Europeans are doing so and so. Americans, I thought worse than what's going on, still not great, but Asians is a good contributor to Europe.

Okay. Very clear. And then maybe on the American consumer, are you expecting a change in the engagement from that consumer? I guess the basis of comparison at the beginning of the year is very high. But with equity markets being at all-time highs, does that influence them coming back a bit more strongly?

I have an expectation on United States. Yes. The results we have achieved in Q1 is also having closed a number of stores for Prada in United States in January. 4 or 5 or 6. I don't remember exactly the number. So I really hope that this engine growth, I think that United States could be a positive surprise.

We're now going to proceed with the next question. And the questions come from the line of Louise Singlehurst from Goldman Sachs.

Just 2 left for me, please. Again, you must be absolutely delighted with the performance in Q1. And the one thing that was in the opening commentary was the fact that Prada delivered that very strong growth of plus 7% on the toughest comp of last year. I just wonder, as we look out to the rest of the year, we would be right to assume that you see a nice acceleration in the second half of all the information that we know today, obviously, all else equal, but that's fair to assume that Q1 could very likely be the lowest quarter for growth that we've seen in the -- the 7%. And then the second question, I would just like to ask about the growth of Miu Miu. Obviously, there's a huge amount of momentum going on. But how are you managing that growth? And I mean that from the product supply chain, but also the staffing levels and operationally, presumably, you've got lots of product shortages or you're running shy of product in some of the stores. So I wondered if you could just talk to us about that and the planning for '24.

So regarding your first question, I don't have an answer. That is my introduction was all about this. This is a year to be lived week after week. So happy to what happened until April the 24th, but I really do not know how things will move. I am more positive on the United States, I am a little bit less positive on China. I am a little bit more positive on Europe. So I really do not know. I have to be honest. And you may dislike my answer, but this is an honest answer. We will continue to do our best to grow over market average. In terms of Miu Miu, I mean, there is a group of people really working day and night, 7 days a week. I think that since a year, we have been preparing ourselves to today in terms of getting the inventory, getting proper sell-through, getting proper people in the stores, analyzing the KPIs in order to understand where productivity goes over those human limits. And for sure, we're stretched. For sure, there is a lot of things that we could do better. But as people say, it's nice to have these problems.

We are now going to proceed to the next question. And the questions come from the line of Thomas Chauvet from Citi.

Three questions, please. The first one on the product brand. There's been a lot of newness in handbags over the last couple of years, but also a refocus on iconic lines. What is today the share of icons in what you would call icons in products leather goods business, particularly Galleria and Ilan. That's the first question. Secondly, on Miu Miu, it continues to grow at an extraordinary pace. If you forget about '24 and think medium, long term, have you ensured that the brand evolves into something that can be really a steady growth business going forward rather than a sort of a boom-and-bust fashion-driven brand? Obviously, we've seen that in the industry in the past at other brands and also on Miu Miu's scale, obviously, it will probably be a EUR 1 billion revenue brand this year if it grows at about 50%. At this level, would you expect profitability to be very close to Prada brand? And just finally, on segment reporting, if I'm not mistaken, you've removed the segment disclosure by product category in your press release. So I was wondering if there's a reason for wanting to simplify maybe disclosure. And perhaps for the purpose of a model, could you give us the constant FX growth in Q1 for leather ready to wear and footwear?

So regarding your first question on leather goods, yes. Nylon, Galleria or -- I mean, this is the leather goods business. Leather goods business has been able to nurture your icons on one side and be bold on your new styles. What's good about Prada is that as you have seen Galleria and Nylon are taking our attention. But on the other side, all the soft looks line and all the Kline had quite a bit of an interest in the past, I would say, 9 months. So I think that the traction is there. In terms of Miu Miu, I don't think I really understood your wording, maybe my English -- I didn't understand you were asking if -- I mean it's going -- or was structural? Was that the question?

No, it's just that Miu Miu will reach a scale that it has never reached before. Obviously, it's growing at a pace that suggests there is extreme brand heat desirability at the moment. There's a very strong fashion component in that. We know that these fashion brands come and go. So how are you thinking as the brand is gaining scale of making sure that this is going to become something really a steady growth business. The brand historically has gone through ups and downs. So I wanted to know what's changed here as you're going to have to manage the scale of that brand? How do you ensure that this becomes perhaps a bit more of a steady growth business? Really, you can't grow at 80% or even 50% forever, and this will end probably at some point later this year or next year. So how do you manage that kind of fashion risk in that particular brand and with scale, what kind of profitability are you assuming for Miu Miu this year, assuming it will be probably around EUR 1 billion of sales.

So regarding this conversation, I mean, my answer to your question would be pretty obvious. That is, obviously, we are trying our best to make this growth structural, to allow the roots of the brands to grow in a solid manner, to build on different nationalities, to build on all product categories. We missed one in the last years, and it's back, and building on ages. So this is really what we are trying to do and obviously, also in terms of space to allow Miu Miu to have the proper space. So this is what we are doing. Our creative director is always the same with always the same unbelievable creativity and progressive attitude. So this is what we are doing on the Miu Miu side. And obviously, I agree with you that we imagine that we will continue to grow at this kind of rhythm is unrealistic. But on the other side, to achieve a proper position in this industry by Miu Miu, I think it's a proper objective. Obviously, profitability grows more than proportionally. I don't remember if you had the third question.

I'm happy to take it. The third one was on segment disclosure and about the split by product category and why if there's any particular reason why we removed it. I mean, the reason is that we don't look at that KPI at the group level as a management team. We look obviously at that KPI, i.e., the product category split by brand. And that's why we thought that it wasn't particularly insightful also to report it at group level. I do understand, however, the question and the curiosity about knowing performance. Andrea already said it, albeit even clearer, leather goods, both at group level and for Prada as well, was the only category that quarter-on-quarter accelerated. So from Q4 '23 to Q1 '24.

We are now going to proceed with the next question. And the questions come from the line of Charles-Louis Scotti from Kepler Cheuvreux.

Yes. I have 3. The first one is on Miu Miu. As the brand is gaining scale, is there any chance you can give us an idea of the revenue breakdown for the brand by Chanel's category and geography and especially if it defers greatly from the group average. My second question relates to Prada. You have just introduced a very high-end bag that studied large extra Galleria, which, if I'm not mistaken, is twice more expensive than the average of your bags today. It is that out of stocks already online. I'm just curious to hear how clients have reacted to this higher price point for our max? And my third question is about the press articles suggesting that you could be working on the dual or even triple listing. So I'm just curious if you have any update to share with us on this topic.

Regarding Miu Miu split, the only thing I would add is that today, we are underrepresented in North America, and we're still underrepresented in leather goods. And both are growing above the average of the brand today. Galleria. Galleria high end. This is a journey. And I think that a year ago, we had a similar journey that went sold out. This year, we have done it in a more elaborate manner. And we just launched 15 days ago, and it's basically sold out. So we're not even talking about big volumes, but it's doing really well to the iconic Galleria. On dual, triple, quadruple listing, Andrea probably can give you a non-update.

I'll be very firm, though on one point, which is the triple listing has never been and is not on the table. The dual listing, it's in our agenda. So I keep saying the same thing. It's another agenda, but we also -- I'll also keep saying that it's not a priority for us at the moment due to a lot of other priorities from a strategic organizational digital evolution standpoint. So in terms of timing, we're not in a position to give an update.

We are now going to proceed with our next question, and the questions come from the line of Liwei Hou from CICC.

Congratulations on the good results. I assume it must be a great joy seeing past efforts paying off and continue to pay off. I have 2 questions. The first one is it's okay to share with us the number of clients that we are serving currently globally? And how has that number of active customers changed versus last year or even versus 2019? This is the first one, and I'll ask the second one later.

So regarding this, we are following up nationalities. I don't have a perfect figure of your question, to be honest. On the other side, the difference compared to a year ago is that we are serving more Chinese outside China, we're serving a little bit less Americas outside America.

Got it. And my second question is more of a philosophical one. So coming from a position of strength, if we have been given to options, one is to spend more money, but have higher revenue growth. The other one is to have more control spending and to maintain a very high profitability. What would be your choice at this time of the cycle?

It's Andrea Bonini. On this question, which is a good question, we always say the priority is delivering above-market growth and investing behind the brands. Having said that, we always need to find the right balance. And in a year like this is it's increasingly challenging. We need to be dynamic. We need to be reactive. We want to continue to invest and take market share at the same time, as we said before, on a full year basis, the ambition is to maintain a trajectory or a trajectory of progressive margin expansion. So that's the balance we need to find. This year, in particular, we reiterate this ambition of progressive margin expansion on the full year basis, purely from a phasing and basis of comparison, I expect operating leverage to be more visible in H2 this year because of marketing activities being more H1 weighted. But as I said, I mean, we reiterate also this ambition, and that's it.

We are now going to take our last question, and it comes from the line of Chris Gao from CLSA.

Congrats on the stellar performance this quarter. So I have 3 questions. Firstly, about Miu Miu's retail operational metrics. So we know that Acrylate leather bag is stellar. So as you cross over with new balance, the footwear is really good. Can you share a little bit more about how your traffic, your conversion, your unit per transaction repurchase, how are these measures given the strong store sales of Miu Miu? So this is the first question. My second question is regarding Miu Miu's average store size improvement and also the plans about enlargement and relocations, because we know scaling up. So do you think it is more likely for Miu Miu to get a better location, bigger space in shopping malls? And for your 2025 plan to have 10 to 15 openings for Miu Miu, does that include relocations? And also, what can we expect about your average store size improvements where you are opening new bigger stores or relocate to new bigger stores? The third question is regarding the e-commerce. We wonder how does e-commerce channel growth look like for both Prada brand and Miu Miu. And can we know right now about the share of e-commerce contribution for both brands? These are my questions.

So regarding the different KPIs in Miu Miu growth, I mean, when you're growing 90%, everything is going up. This is being store traffic. I'm happy that our conversion rates are going progressively upwards. Our prospect catching and prospect conversion is going up. Our ability to call back consumers to our stores is going up more proportionally. So I think that, as I said at the beginning, our retail execution projects are moving on. In terms of store openings and store replacements, repositioning's, the 10, 15 is the net openings. So new opening more square meters and more square feet. In terms of e-commerce, I would say that we had a kind of COVID boost, then we had a kind of COVID post boost. And today, we're back to a normal trajectory somewhere in the region of the 10% mix.

Okay. This is very helpful.

Thank you. And with this, I will thank you. I will leave it to Andrea. Andrea will tell you more.

I will not have much to add, but thank you all and looking forward to speaking again for the H1 results. Thank you. Have a good day.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you, and have a good day.