Prada’s Patrizio Bertelli on Size, China, Not Selling Brands and Store Experience
MILAN — Patrizio Bertelli is not a seller.
Prada’s chief executive officer is not new at making this kind of statement, having shut down rumors of a sale of the luxury group he leads several times over the years. But on Wednesday, Bertelli repeated the vow during a conference call with analysts held to comment on the group’s 2020 performance.
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Asked about the lackluster performance of Car Shoe and Church’s, controlled by the Prada Group, at a time when mergers and acquisitions activity is heating up in footwear, and whether he would consider selling them, Bertelli responded: “We are not selling anything; if something happens we’ll be buying not selling.”
He explained that “of course, [Car Shoe and Church’s] suffered more than the other brands for the very simple reason of their size,” and because they are “typically European products.” Also, he noted, “it was impossible to organize e-commerce distribution suitably for them. So, the smaller a brand, the more it suffered last year. Because these brands don’t have a distribution network in countries like China, for instance, which is actually where the market picked up quicker than others in the second half of 2020.”
Bertelli’s observations point to several key factors that contributed to Prada navigating 2020 and weathering the impact of the COVID-19 pandemic, helping to offset the consequences of the global lockdowns and travel restrictions, with an acceleration in the second half. These factors included Prada’s strength in Asia, the improved digitalization of the company and a retail recovery outside of Europe.
The Italian luxury group reported a recovery starting in May last year, reaching full retail recovery in October and December compared with the same months of 2019. Business was also lifted by Prada’s digital evolution as the company reinforced its omnichannel strategy, seeing sales from the e-commerce channel tripling from 2019 levels. Sales in Mainland China climbed 52 percent in the second half of 2020.
While Prada reported a net loss in the year, the group saw a full recovery in the second half to pre-pandemic profitability levels, allowing it to close 2020 with an operating profit.
In 2020, the net loss totaled 54 million euros. This compares with net profits of 256 million euros in 2019, but that figure was lifted by the Patent Box tax benefit. In the second half of last year, Prada registered a net profit of 126 million euros.
In the 12 months ended Dec. 31, revenues totaled 2.42 billion euros, down 24.8 percent compared with 3.22 billion euros in 2020. Sales in the second half decreased 8 percent compared with the same period the previous year.
However, despite all the attention paid to digital, Bertelli in his staple, no-nonsense way firmly underscored that “e-commerce doesn’t make sense without physical stores. I think it’s just an illusion that e-commerce may thrive without some brick-and-mortar stores.”
He contended that luxury consumers “need some physical experience, too and not just online. They need to go to the source and look at product presentation. So they need to come in the stores and touch [the merchandise].”
This means presentation and service must be of the highest quality and targeted and personalized to engage customers — who are increasingly local and in the second half of the year almost fully offset the absence of tourists, he noted. Last year, Prada launched special initiatives creating about 80 installations including pop-ups and dedicated installations, 50 of which were in the second half.
Bertelli and chairman Carlo Mazzi touted Prada’s business model rooted in Italy, which entails direct control over production, so that the country’s manufacturing shutdown during the first wave of the pandemic in Italy was limited to five weeks last year, allowing for continuous deliveries of merchandise to the stores, preventing excess inventory.
“Direct control of the supply chain and distribution channels combined with a focus on digital communication are the pillars of positive future prospects, and an encouraging start to 2021 in spite of continuing restrictions in an environment that is still uncertain,” said Bertelli, which led Mazzi to say that the group “is well positioned to capture long term-growth.”
“We successfully reached a good level of profitability and generated significant cash flow, improving our financial position,” said Bertelli. “These results give us confidence to face the upcoming rebound, as soon as the most critical phase of the pandemic will end.”
Last year, operating profit amounted to 20 million euros, compared with 307 million euros in 2019. However, in the second half operating profit totaled 216 million euros.
At the end of December, retail sales amounted to 2.11 billion euros, down by 32 percent in the first half although this reduced to a 6 percent decrease in the second half of the year, hence an 18 percent drop over the year.
Around 18 percent of the network was closed on average during the year, affected by the lockdowns. Chief financial officer Alessandra Cozzani said the retail performance was “flat on 2019, but up mid-single digit on 2020. We are operating with 130 stores still closed so it’s a huge number.”
The wholesale channel showed a 49 percent decrease at constant exchange to 275 million euros, as a consequence of Prada’s decision to streamline its distribution. Wholesale sales were down 20 percent in the second half. The channel accounted for 11 percent of total sales. Bertelli expects the wholesale strategy to boost operating margins and for gross margin to represent 78 percent of sales in two years, from the current 72 percent, which improved by 100 basis points in the second semester reaching 73 percent versus the same period of last year. This is a trend that is going to be “anywhere in between the performance of 2019 and the performance of the second half of 2020.”
“In terms of EBIT, it will be pretty challenging until June, but likely to become easier after that,” Bertelli added. “The trend in the first two months of this year points to a similar one in the other nine months,” he offered, expecting ongoing progress and advances.
Bertelli stood by the rationalization strategy started back in 2019, which led to giving up on about 250 million euros in revenues last year, but the company was “on the safe side as far as trade receivables were concerned.”
The executive touted the group’s creative leadership as “a reference point and benchmark in the international luxury market,” noting growing appreciation by consumers and trumpeting the appointment of Raf Simons as co-creative director last year. The fashion shows designed by Miuccia Prada and Simons “were highly appreciated and the new collections are responding very well in stores. The investments in digital besides marketing and communication to create an authentic and direct dialogue with our audiences are helping to strengthen the visibility of our brand.”
The CEO also said that the public talks held by Simons and Miuccia Prada at the end of each fashion show “were highly appreciated, both by the press and by the public.”
Bertelli also discussed the group’s price positioning, saying it had been corrected, with “quite significant improvement,” noting that he was “partially satisfied because we actually recovered something which we had underestimated in the past. I need to point out that the price positioning is not just given from increasing prices onto two products, but also we modified our product offer. We are providing products that have a higher perceived value and so they can command a higher price point.”
In 2020, sales in Europe fell 35 percent to 561 million euros, heavily impacted by the absence of tourists and by prolonged lockdowns. The company said that around 30 percent of the stores were closed during the year. Strong local consumption was seen in every country, including a 46 percent sales growth in Russia.
Sales in Asia Pacific rose 1 percent to 914 million euros, with 19 percent growth seen in the second half of the year, mainly driven by Mainland China, which was up 52 percent; Taiwan, up 61 percent, and Korea, up 22 percent.
Revenues in the Americas decreased 17 percent to 291 million euros, growing 4 percent in the second half of the year. This includes an outstanding performance in Brazil, which grew throughout the year.
Sales in Japan were down 28 percent to 272 million euros, heavily impacted by the lack of tourists and prolonged store closures in Hawaii, Guam and Saipan, said Cozzani. Local consumption improved in the second part of year.
Revenues in the Middle East dropped 12 percent to 78 million euros, but rose 26 percent in the second half.
Lorenzo Bertelli, head of marketing and CSR, said the company will continue to target triple-digit e-commerce sales and that it was further strengthening its omnichannel, enhancing the group’s platform.
“I want to underline we’re just at the beginning of our growth trajectory and that there is still a huge potential to unlock. We have leveraged more ways of staying connected with clients through our social media platform both in the West and especially in China and our brand heat us is growing successfully,” he said. “We have used with our fashion shows innovative ways to drive engagement and brand excitement and adopted a more accessible style of communication that has brought new forms of interaction with the brand and made it available to new audiences.” He noted a younger demographic was increasingly attracted to the group’s products.
Prada ranked third on Instagram in the second half, according to Sprinklr, he said, and website traffic grew 74 percent in the second half, according to Adobe Analytics. Prada ranked third on Weibo in the second half, according to Sprinklr.
The hashtag #PradaSS21 on Weibo hit 170 million views in one day. Miu Miu’s spring 2021 fashion show was the third most mentioned brand at Paris Fashion Week and reported triple-digit growth in views on Instagram compared with the spring 2020 season.
“I’m proud to announce that the full conversion to regenerated nylon by the end of 2021 is on track despite the difficult times,” he also said.
Asked about Luna Rossa, which won the Prada Cup in February and is competing in the finals of the America’s Cup, he said, “We believe that in this moment this is a very important pillar for us because if we’ve been contacted by Adidas and we are relevant when we go to talk about sports with some suppliers and do collaboration in the sports, it’s because of our credibility, because 20 years ago my father started [the Luna Rossa sailing boat project]. So without this kind of credibility, we would not be strong in the sports world.” At a time when experience and storytelling are increasingly relevant, Luna Rossa is the “perfect match,” he said and one that can “unlock the potential of [apparel and accessories collection] Linea Rossa.”
Bertelli also touted the success of the Upcycled by Miu Miu project, a special collection of vintage dresses transformed according to Miu Miu’s aesthetic codes, revealing the brand will collaborate with Levi’s in 2021.
The leather goods category, which accounted for 56 percent of sales, saw double-digit growth in the second half of the year in Asia, the U.S, and the Middle East. Ready-to-wear at both Prada and Miu Miu resumed growth in the second half of the year. The division represented 26 percent of total sales. Footwear also recovered in the second half, and accounted for 17 percent of revenues in the year.
Prada, whose sales were down 17 percent last year, accounted for 84 percent of revenues. Miu Miu declined 22 percent and represented 14 percent of total sales. Church’s fell 47 percent and accounted for 1 percent of revenues.
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