Company Reports

We are maintaining our fair value estimate of HKD 51 per share for narrow-moat Prada as the company reported strong first-quarter sales boosted by continuing positive brand momentum. We believe shares are fairly valued, trading at 24 times forward earnings. We think its current performance is helped by the favorable fashion cycle, which we don’t extrapolate being longer than a few years as fashion cycles tend not to last and sometimes revert themselves. For example, the poor performance of Prada from 2014-19 and Kering’s Gucci weakness currently.

We maintain our fair value estimate for narrow-moat Prada at HKD 51, with the company reporting EBIT of EUR 1.062 billion, aligning closely with our estimate. The gross margin reached 80%, marking a 160-basis-point increase year on year, underpinned by improvements in average pricing, channel mix, and enhanced scale. Notably, the company demonstrated significant progress in profitability, with EBIT growing by 26%, despite operating expenses rising by 15% at constant exchange rates, mainly attributed to increased marketing expenditure, variable costs, and labor expenses. For 2024, the company expects to deliver above-market growth.

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.

We maintain our fair value estimate for narrow-moat Prada Group at HKD 48 per share as the company reported solid sales numbers for the first nine months. Like other luxury peers, Prada Group has seen a meaningful deceleration in the third quarter with 10% growth (broadly in line with peers like LVMH with 9% growth for its fashion and leather goods division and 9% growth for Moncler), compared with around 20% growth delivered in the first half. We believe Prada Group should be among the top luxury performers over the near term on strong brand momentum. That said, we see shares as fairly valued at current levels.

We maintain our fair value estimate for narrow-moat Prada as the company reported solid growth and profit improvement in the first half of the year.

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, helped by supportive brand momentum, which is in turn helped by the fashion cycle, and in our experience lasts around 5 years.

We are increasing our fair value estimate for Prada to HKD 48 from HKD 38 as we incorporate full-year 2022 results and first-quarter revenue into our models. Around 15% of the fair value estimate increase stems from currency moves and time value of money, while the rest is driven by our assumptions for stronger near-term growth helped by brand momentum and faster margin scaling. We still view shares as expensive at current levels.

We expect to increase our fair value estimate for narrow-moat Prada by a low-double-digit rate to incorporate stronger-than-expected revenue growth and faster margin expansion than we anticipated in 2022 and over the next several years. We still view shares as expensive at current levels, trading at almost 30 times forward earnings, as our valuation already incorporates continued margin expansion.

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 7.2%, 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 of manufacturing, should put the brand on a stronger footing and reinforce 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.

We increase our fair value estimate for narrow-moat Prada to HKD 38 from HKD 36.50 to reflect better expectations for full-year growth and profitability on the back of strong first-half results and time value of money somewhat offset by negative currency effects. Despite a solid performance we see shares as rather expensive at current levels. Our forecasts call for 6%-7% long-term revenue growth and margin scaling to 24% (from 14.5% reached in 2021) at a defensible level.

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 in the short run (return on invested capital currently at 7.2%, 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. Prada is a relatively late adopter of digital distribution and marketing channels. These channels will need capital investments in the short term (at a lower rate than prior-year retail expansion) but could become quite profitable over time. 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 of manufacturing, should put the brand on a stronger footing and reinforce its moat. 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.

We are increasing our fair value estimate for narrow-moat Prada to HKD 36.50 from HKD 33.50. Our increase stems from time value of money, currency moves, and our more favorable view on near-term profitability development (our long-term expectations for low-20s operating margin remain intact). The recent sell-off has left Prada shares trading approximately in line with our new fair value estimate.

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 in the short run (return on invested capital currently at 7.2%, 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. Prada is a relatively late adopter of digital distribution and marketing channels. These channels will need capital investments in the short term (at a lower rate than prior-year retail expansion) but could become quite profitable over time. 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 of manufacturing, should put the brand on a stronger footing and reinforce its moat. 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.

We are not making any changes to our fair value estimates for our luxury and apparel coverage list due to Russia-Ukraine armed conflict. The luxury industry’s exposure to the Russia and Ukraine is small, accounting for a low-single-digit percentage of revenue, by our estimates. We believe that the conflict is unlikely to dampen consumer confidence in China (primary long-term growth driver) or the U.S. (driver of growth in recent years). European consumer sentiment (low-20% of industry’s sales) may be affected, should energy-related inflation accelerate meaningfully as a result of conflict; however, Morningstar's view is that the likelihood of gas delivery disruption to Europe from Russia is low. That said, most luxury names in our coverage look expensive to us, and we would recommend investors await a wider margin of error for investment in the sector.

We maintain our fair value for narrow-moat Prada after attending the company’s capital markets day, or CMD, on Nov. 18. During the event the company announced its "midterm" financial targets (no precise time reference for midterm) of EUR 4.5 billion in revenue and EBIT margin target of around 20%. Our current model calls for this level of revenue by 2026, implying high-single-digit revenue growth post-2021, with the EBIT margin exceeding 20% by 2025. The company stuck to its gross margin target of 78% (72% over the past five years and 76% in third-quarter 2021). We have previously struggled to see the sources of further gross margin progression given the already very high penetration of own retail (more than 90%) and very low discounting (full price almost 100% of sales currently). During the CMD the company provided more color on sources of margin expansion. Notably it comes from manufacturing efficiencies: the number of SKUs has been reduced by 30% since 2019, with further room for reduction, leading to less inventory, less manufacturing complexity and more scale. The production cycle has also been shortened by 30%, which should help be more reactive to the demand on the upside and downside. In-house manufacturing has been increased to 40% for leather goods (20%-25% in 2017) and could grow further to 60%, boosting margin. Finally, pricing power could be maintained in the years to come, given improving brand momentum. While we now see more paths for further gross margin expansion, we believe those are also currently positively affected by a number of transitory tailwinds from increased consumer demand and still tight cost controls.

After a perfect storm in 2020, the luxury industry looks poised for a blue-sky scenario in 2021 as a strong sales rebound is driven by resilient luxury consumers' incomes, steady real estate, and strong equity markets as well as savings from previous coronavirus lockdowns, and the psychological need for people to reward themselves after a stressful time. As a result luxury share prices have rallied, leaving many industry players trading near record levels. Nonetheless, we could not identify structural changes in the industry post-COVID-19 that would justify sustainably higher growth and profitability, and hence, valuations. We believe the pickup in gross domestic product, or GDP, and luxury consumption in the U.S. is temporary. Although we expect Chinese consumers to continue driving the industry's growth, we don't expect post-COVID-19 acceleration, while the "common prosperity" drive by the Chinese government could temporarily hurt the industry through higher taxation and adverse sentiment over conspicuous consumption. Finally, although we expect online luxury sales to reach over 30% of the industry's sales over the next decade from low teens in 2019, we don’t expect this shift to meaningfully alter the industry's economics. Luxury companies are likely to preserve their pricing in the channel, thanks to growing control over distribution and the industry's inherent pricing power. While the online channel for the luxury sector looks more profitable than for mass apparel--thanks to higher average order values and lower return rates--the shift is unlikely to result in a major profit increase for companies that already have high in-store sales densities, such as LVMH's Louis Vuitton. Companies with lower sales densities, such as Hugo Boss, could benefit from the shift as long as they manage their store portfolios proactively.

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 in the short run (return on invested capital currently at 1%, 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. Prada is a relatively late adopter of digital distribution and marketing channels. These channels will need capital investments in the short term (at a lower rate than prior-year retail expansion) but could become quite profitable over time.

We are increasing our fair value estimate for narrow-moat Prada to HKD 33.50 to incorporate our better expectations for 2021 sales, following strong first-half results. Like its luxury peers, Prada reported strong recovery in sales in the first half of the year, with revenue up 66% at constant currencies against 2020 levels and down 1% against 2019 levels. Retail revenue was 8% above 2019 levels on a comparable basis, pointing to solid end customer demand. Wholesale was impacted by the company’s actions to curtail channels and was down 37% versus 2019. Retail sales accelerated through the semester reaching double-digit growth against 2019 in the second quarter. The strongest retail sales momentum was seen at Prada brand (+13% against 2019), ready to wear category (+24% against 2019 levels). Geographically, retail sales have been driven by Americas (up 53% from 2019 levels), Asia-Pacific (+35% against 2019 levels), and Middle East (+28% against 2019 levels), while Europe and Japan lagged similar trends as seen at previously reported peers.

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 in the short run (return on invested capital currently at 1%, 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. Prada is a relatively late adopter of digital distribution and marketing channels. These channels will need capital investments in the short term (at a lower rate than prior-year retail expansion) but could become quite profitable over time.

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 in the short run (return on invested capital currently at 1%, 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. Prada is a relatively late adopter of digital distribution and marketing channels. These channels will need capital investments in the short term (at a lower rate than prior-year retail expansion) but could become quite profitable over time.