Prada Retains Competitive Advantage Despite Slowing Asia

Prada Group shows high margins and returns on capital. The Italian company possesses one of the most visible luxury brands in the world and has long-term growth prospects

Paul Swinand 30 December, 2015 | 10:30AM
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The two most significant elements suggesting that Prada (01913) has key competitive advantages are its enduring brand and its high returns on capital. As such, we rate Prada as a wide-moat company, signifying our belief in its ability to continue to achieve high returns and the difficulty competitors face when attempting to encroach on its brand equity.

Sales from the leather goods segment represent around 62% of total revenue

The Italian company possesses one of the most visible luxury brands in the world and continues to enjoy long-term growth prospects. Prada Group shows high margins and returns on capital, with operating margins running historically at more than 20% and returns on invested capital in the mid-teens. We still see potential improvement as the store base and operating margins grow.

The company is working on narrowing and improving its distribution channels, focusing more on retail with new directly operated stores and also with the conversion of wholesale sales points to owned retail, such as through concessions operated in department stores. The retail growth strategy is having a positive impact on gross margins, as the company recaptures the wholesale and retail mark-up and a long-term shift from Europe to emerging markets should also positively influence the overall cost structure.

Prada's high profitability is driven by gross margins of more than 72%, with sales from the leather goods segment, which represents around 62% of total revenue, an important contributor. We believe this segment to be historically a source of competitive advantage for Prada and other leather goods makers, as consumers tend to be more brand-loyal in this category and the quality of goods is harder to copy.

Prada gets about a third of its sales from Asia, excluding Japan. Although we believe the rate of growth will be slower than the past, the group still has some opportunities to develop the store base. New stores serve to reinforce its presence from a marketing and a visibility standpoint, and luxury goods makers in some cases must lock up key locations in the top cities, making it harder for new entrants to compete.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Prada SpA59.80 HKD3.73Rating

About Author

Paul Swinand  is an equity analyst at Morningstar covering department stores, luxury goods, sporting goods, apparel and footwear.

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