Strong euro hits Prada, China and clothing strong but shoes, bags struggle

Prada said Friday that sales were cooling off due in part to the strong value of the euro hitting the purses of tourists visiting Europe and shopping for luxury goods.

The Italy-based, Hong Kong-listed luxury house said overall net sales slid 5.7% on a constant exchange rate basis in the six months to the end of July to €1.47 billion ($1.77 billion).

Net profit slumped 18.4% to €115.7 million at the firm that also includes the Miu Miu, Church's and Car Shoe brands.

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Sales in Europe fell by 7.7%, or 6.6% on a constant exchange rate basis, with only its clothing lines bucking the downward trend, which is a problem as margins are higher for bags and shoes.

"The stronger euro at the end of the period adversely affected tourist spending," said Prada, adding that the US was a tough market too.

By region, greater China was the only area to post growth, although that is encouraging because it’s an important country for the firm. China’s crackdown on corruption and too-conspicuous consumption had hit luxury sales for many brands in recent years. But while Prada’s rivals got back on the recovery trail, the Italian influencer continued to struggle, so any positive news on its China ops is to be welcomed.

But it clearly wasn’t positive enough to make up for the fact that it had not been able to generate the kind of growth in other global markets that its rivals have enjoyed.

So why is Prada struggling when brands such as Gucci are going from strength to strength? Some have suggested the product just isn’t the must-have it once was. However, recent collections have been well received and its ostrich feather trimmed clothing appears to have been a success, as higher clothing sales in the period show.

But sales of leathergoods took a hiding in the first half, dropping 7.9%, and footwear sales that had previously been a bright spot stumbled 9.5%. With luxury sales expected to rise around 2% this year and Gucci enjoying a near-50% increase, some brands were always going to find that their share of the luxury cake would shrink and it seems Prada is facing this reality.

It all led CEO Patricia Bertelli to say that the firm’s turnaround could take longer than expected after earlier declaring 2017 to be the year in which the turnaround would come to fruition. With the company investing heavily (over €105 million) in stores and e-tail to improve its performance, it’s unsurprising that profits are taking a hit. But whether the company can drive sales of higher margin products up sufficiently to drive profitability upwards remains open to question.

Additional reporting by Sandra Halliday