If there were one thing more delicious than owning a Prada handbag, it was owning Prada stock. In the last year, the Hong Kong-listed shares of the Italian luxury goods group have climbed about 70 per cent. For that, investors could thank near explosive growth in China and the rest of the Asia-Pacific region.
But could China keep bestowing gifts on investors when it was apparent to everyone that its growth rates, while still dazzling by European and North American standards, were coming down?
Two weeks ago, British fashion house Burberry, best known for its plaid patterns, spooked investors with a profit warning triggered by slowing sales in China. Since then, Burberry shares have dropped more than 20 per cent and reached a new, 52-week low of 1,025 pence on Monday morning. The shares of rival companies also slumped, though not to the same extent.
Some investors feared that Prada, which derives more than a third of its sales from Asia-Pacific, would be the next victim.
It is not, at least not yet. On Monday, Prada reported earnings that were just a tiny fraction below analysts’ targets. First half net profit climbed 60 per cent to €286-million ($362-million). Once again, the driver was Asia-Pacific. Sales in China rose 50 per cent to €334-million. Same store sales were up 19 per cent. Prada, it appears, has not lost confidence in China, nor Chinese shoppers in Prada.
Prada shares closed up 1 per cent on Monday. What ailed Burberry did not ail Prada. Part of the explanation may lie in the difference between the two brands. Burberry is considered the high-end of the popular apparel market; Prada is solidly in the luxury camp. In that sense, Prada may have more staying power in China. Prada, which sells leather goods as well as apparel, is also more diversified than Burberry.
But can Prada’s strong run keep going? Some analysts think it’s just a matter of time before the Chinese slowdown hits Prada, all the more so because is shares have vastly outperformed both the Hang Seng and luxury sector indexes. Its shares trade at about 30 times earnings. That’s rich compared to Burberry p/e multiple of 17.
“Prada has held up remarkably well because of is retail under-penetration, delivering upside surprises in the last three quarters,” retail analyst Gloria Tsuen of CIMB told CNBC Asia. “However, as the industry headwinds intensify, we think it will likely starting being affected as well.”
And don’t forget that much of Europe is back in recession. China’s fortunes are absolutely crucial to Prada’s fortunes.
In a statement, Prada said it remains “confident about the near future” and will continue to open stores (it had 414 at a the end July). Clad with luxury p/e ratio, you can understand why Prada did not extend its confidence to the medium term.