Is Prada Stock a Buy?

As the world economy is slowly recovering from the unprecedent pandemic crisis, there are signs of a sustained return to consumer spending, particularly for regions which have controlled the outbreak better.

People also tend to shift some spending from consumer staple goods (i.e., food, beverage, and household products) to consumer discretionary goods (i.e., automobiles and luxury apparel).

Luxury apparel is generally a cyclical and competitive industry with a high sensitivity to not only to economic cycles but also to the ever-changing fashion trends.

Investors who are interested in this industry will be familiar with the Hong Kong-listed Italian fashion company Prada S.p.A (SEHK: 1913).

The company operates well-known brands such as Miu Miu, Car Shoe, and Church’s, besides its flagship Prada brand. But is the stock a buy for investors?

Latest highlights

In its recent company results presentation, management of Prada highlighted the disruption by lockdown and restrictive travel measures.

In between February and May, Prada had closed, on average, 40% of its physical stores, with April as the worst month with average store closures of 70%.

However, sales started to pick up on gradual store reopenings. June’s retail sales had recovered to roughly 80% compared to January’s levels, adjusted by average store opening percentage.

One can interpret the result as that “the worst is perhaps over”, but it also illustrates that the Covid-19 pandemic has exposed the weakness of Prada’s reliance on brick-and-mortar like many other luxury good producers.

Nonetheless, the management team recognised the problem a few years ago when they hired Lorenzo Bertelli, who was tasked with improving Prada’s digital strategy and sustainability efforts.

Slow mover to e-commerce

Like many European luxury brands, the Asia-Pacific region – specifically China – is a major sales driver for Parda’s growth.

This is not a surprise as China’s luxury market is estimated to reach up to RMB 1.2 trillion (US$175 billion) by 2025, according to a report by McKinsey.

One may counter-argue that the ongoing US-China tensions may dampen the mood of this trend, but regardless, the China market is too large to be ignored.

In order to be successful in the e-commerce space in China, it is essential to partner with the dominant technology platforms like Tencent’s WeChat mini programme, Alibaba’s T-Mall, and Sina’s social network – Weibo.

Prada is late to play the e-commerce game in China. It only launched its first Weibo post in early 2016 (compared Dior and Gucci in 2011 and Hermes in 2014), and opened its T-Mall store only in early 2020.

That said, Prada is catching up quite quickly and reached quadruple-digit growth in terms of engagement on Chinese social networks.

Though it still lags its competitors, Prada’s Weibo account has already accumulated 1.3 million followers.

Though Prada is slow to the game, by all means, it also provides some late-mover advantages – it can learn from pioneers’ mistakes and see various marketing responses to allocate their resources more efficiently and effectively.

Prada seems to be gaining momentum with its continuing investment in its e-commerce strategies. This is true not only in China. It has been enhancing its e-commerce efforts in other key markets like South Korea and Brazil.

Foolish conclusion

In terms of valuation, Prada is trading at similar forward multiple as compared to its competitors like Hermes.

At this multiple level, the share price of Prada is certainly not a bargain. Yet with the impressive recovery and its undivided focus on e-commerce developments, Prada can be an attractive option in the luxury apparel space.