Prada : Challenging times

Prada reported Q2 results with sales up +3% and earnings down -18%yoy to EUR139m vs our forecast of EUR180m. GPM was disappointing dueto FX as well as unfavourable product and channel mix. We lower ourrevenue and earnings forecasts to reflect the soft Q3 and lower leathergoods sales, which are impacted by softer tourist spending. Short-termdatapoints should remain weak. We downgrade the stock from UPF toSELL to a new price target of HK$49 based on 18x CY15 earnings.

Soft Q2 salesAs reported in Aug, Prada recorded net sales up +3% in Q2, or +5% atconstant FX to EUR962m. Retail was flat, impacted by slower tourist spendingand replenishment of popular products, while wholesale was up +14%. Thesluggish tourist spending weighed on leather goods sales, which were down -4% in Q2. Japan recorded solid retail sales growth of +9%, while Americasretail also grew by +12%. Impacted by soft tourist spending, Asia (mostlyaffecting HK, Singapore and Korea) and Europe saw flattish sales growth.

Disappointing GPMQ2 margins came in lower than expected. GPM was down -150bps yoy to71.8%, due to FX and unfavourable product and channel mix. Wider-marginleather goods and retail channel both underperformed the group in Q2. Inaddition, Prada’s investment in the retail network has led to a +14% increasein selling expenses. In the 1H, the group opened a net of 26 new directlyoperatedstores. Off a flattish topline, this resulted in operating deleveragewith Ebit margin declining by -520bps yoy to 21.3%.

2H outlookWe understand that Q3 sales remained soft although FX is turning morefavourable for Prada. Amid the challenging macro environment, managementis focusing on cost controls and improving inventory systems. The groupremains positive on long-term demand for luxury goods by emerging markets’consumers and will continue to open stores in strategic locations. Someopenings however may be pushed back.

Downgrade to SELL to a new price target of HK$49We still believe that Prada is a top-notch brand and the best quality consumername listed in Asia. However, short-term performance should be weak due tooverall slowdown of the luxury goods industry. We downgrade the stock fromUPF to SELL to a new price target of HK$49, based on 18x CY15 earnings.