Prada Stock is a Long-Term Loser. Here’s Why

For fashionistas among us, Prada S.p.A (SEHK: 1913) is a well-known Italian fashion house. The company has three brands under its umbrella. These include the eponymous Prada but also Miu Miu and Church’s.

Prada first listed shares in Hong Kong in mid-2011, raising US$2.1 billion in its IPO. Floating shares at HK$39.60 nearly nine years ago, Prada’s share price today sits at HK$24.80.

Ever since hitting an all-time high of just over HK$80 all the way back in March 2013, it hasn’t come close to scaling those heights.

So, what went wrong? Here’s why I think long-term investors should avoid Prada shares and why the company is set to lose over the long run.

Victim of China crackdown

Although Prada started off its first year as a listed firm with a bang, it quickly turned sour. That’s because President Xi Jinping’s anti-corruption crackdown in China caught Prada in its crosshairs.

In its 2012 full-year earnings, the company had posted an impressive 29% net revenue growth and 14% growth in same store sales.

However, in its 2013 earnings release, the Prada’s net revenue growth had fallen significantly to 9% while same store sales growth had halved to 7%.

In 2012, Prada generated 36% of its net sales from Asia-Pacific with a whopping 22% of its overall sales coming from China alone.

Strategy mistakes from Prada

One problem that has plagued Prada over the years has been its insistence on opening multiple retail stores.

This has been done while its luxury peers actually scale back store openings amid a changing consumer landscape.

Although the company has now realised its problem with allocating capital to inefficient channels, it seems to have noticed this too late.

It’s still overly-reliant on retail sales rather than utilising wholesale channels. In 2019, retail amounted to 83% of overall sales while wholesale only took up 15% (with DFS the remainder).

Digging deeper, the fact that one brand (Prada) also happens to make up 83% of its total retail sales is a risk. Given the reliance on one luxury brand, the creative push that the firm has tried to drive in the past few years will be a gamble.

As an analogy of why this is a problem, think of the luxury powerhouse LVMH Moet Hennessey L.V. (OTC: LVMUY). It has an array of market-leading luxury brands it can count on.

The French luxury giant would appear to be the antithesis of Prada. And its shares have performed spectacularly, returning over 300% in the last 10 years.

Deteriorating fundamentals

Finally, the firm’s numbers have been below average for many years. Investors could perhaps forgive Prada management if it was a one-off, say in 2013 after the China anti-corruption crackdown.

However, it seems to be a trend. Prada’s operating profit margin was a respectable 27% in 2012 but in 2019 this continued a longer-term trend of falling as it plumbed to a new low of 9.5%.

What’s even more astounding has been its lack of revenue growth. In 2012, the company posted net revenues of €3.256 billion but seven years later, its 2019 net revenues sat at €3.226 billion – effectively flat over the period.

So with a deteriorating operating profit margin, shareholders have actually seen value evaporate over the past seven years.

Stay away from uncertainty

Prada is very much a “turnaround” value stock in that it’s a gamble for any long-term investor. It could perhaps pull off a much-needed rebrand but the indicators don’t look bright.

For me, personally, I would avoid this luxury stock and look to market leaders – such as LVMH – to invest in the sector’s opportunities.