Prada Should Continue Benefiting From Brand Momentum Even as Luxury Demand Slows

Prada is one of the most recognised and best-loved luxury brands and is an important design authority. It has developed a global retail network of over 600 stores for Prada and Miu Miu, many of which are in important travel locations. Although dilutive to returns currently (return on invested capital currently at 9%, versus 13.6% in 2013), control over distribution strengthened the company's brand moat—showcasing the brand, avoiding excessive discounting, and maintaining strong negotiating clout with wholesalers. As the retail infrastructure has been built out and new demand comes from existing stores, operating costs should be leveraged. Recent management's initiatives such as rationalization of wholesale channels, discount reduction, increased digital investments, and investments in marketing, as well as increasing vertical integration and streamlining manufacturing, are putting the brand on a stronger footing and reinforcing its moat. The effect of these actions alongside improved brand momentum is already showing in improved sales and profitability trends in 2021 and 2022, in our view. We believe the company is well positioned to grow revenue by 5%-6% over the next 10 years, accompanied by operating margin expansion to the low-20s, thanks to its brand strength, and general luxury industry expansion (helped by a rise in global incomes), as well as operating leverage, as its store densities improve. Revenue increases over the next few years should be stronger and better than luxury industry, helped by supportive brand momentum, which is in turn helped by the fashion cycle, and in our experience lasts around five years.