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Elevator Pitch
My investment rating for Prada S.p.A. (OTCPK:PRDSY) [1913:HK] is a Hold. The company describes itself as “a global leader in the luxury industry” with “prestigious brands” like “Prada” and “Miu Miu” on its corporate website.
In my August 7, 2019 initiation article, I drew attention to Prada’s moves to “end seasonal markdowns and rationalize the wholesale channel.” This latest update focuses on the company’s plans to allocate EUR1 billion to retail store investments and its potential dual listing.
I have decided to stick to a Hold rating for PRDSY. There are both risks and rewards associated with the company’s investment in retail stores and potential Milan listing, so I continue to have a Neutral view of Prada.
Investors should note that Prada’s shares are currently traded on both the Over-The-Counter market and the Stock Exchange of Hong Kong. The three-month mean daily trading values for the company’s Hong Kong-listed and OTC shares were $12 million and $70,000 (source: S&P Capital IQ), respectively. Readers can deal in Prada’s relatively more liquid Hong Kong shares with US stockbrokers such as Interactive Brokers.
Retail Store Investments Might Translate Into Long-Term Gains At The Expense Of Short-Term Pain
In the prior month, Financial Times reported that Prada intends to spend EUR1 billion on “retail spaces” in “the next five years” to meet the expectations of “high-end luxury consumers” who have a desire for “experiential shopping” and “immersive experiences.”
I take the view that the significant retail store investments that PRDSY has proposed to undertake will be positive for the company in the long run. But this could possibly hurt Prada’s financial performance for the short to medium term.
On the positive side of things, the planned EUR1 billion investment in retail stores might help to boost the future profit margins of its key brand, Miu Miu.
In its FY 2023 results announcement, PRDSY referred to “Prada and Miu Miu” as the company’s “two main brands” accounting for 99% of its top line last year. Miu Miu was the faster growing brand of the two as it delivered a +58% retail sales growth (versus +12% for the Prada brand) for FY 2023. However, the company revealed on its FY 2023 earnings call in early-March 2024 that the Miu Miu brand’s “margins are still below Prada” as the former’s “stores are (typically) smaller.”
At the company’s most recent fiscal year earnings briefing, Prada also emphasized that it has “a commitment to increase the number of square meters” in 2025 and 2026, which translates into “a little bit larger stores in important places of the world” on top of “more stores.” In other words, PRDSY is likely to invest in increasing the average retail store size for Miu Miu going forward to enhance this brand’s future profit margins.
In a nutshell, investing in retail stores could help Prada to attract and retain more high-end shoppers, and also improve the Miu Miu brand’s profitability in the long term.
On the negative side of things, the proposed five-year retail store investment amounting to EUR 1 billion could slow down the pace of profit margin expansion for Prada.
The company’s normalized net profit margin expanded by approximately +200 basis points from 12.2% in FY 2022 to 14.2% for FY 2023. But the analysts see PRDSY’s normalized net margin improving by +40 basis points, +40 basis points, and +60 basis points for FY 2024, FY 2025, and FY 2026, respectively. Moreover, the market anticipates that Prada’s net profit margin will contract by -100 basis points and -20 basis points in FY 2027 and FY 2028, respectively. These consensus profit margin estimates are sourced from S&P Capital IQ. The sell side’s lackluster profitability expectations for Prada in the next few years are likely attributable to the company’s plans for substantial retail store investments.
As a reference, Prada achieved a historical high net profit margin of 19.0% in 2012, so there is room for the company to further expand its normalized net margin for the future. But it is inevitable that the increase in retail store investments will be a drag on PRDSY’s profitability for the intermediate term.
To sum things up, there are both positives and negatives associated with Prada’s ambitious retail store investment plans.
Potential Dual Listing Could Attract More Investors But Current Valuations Are Fair
In October 2023, a Reuters article cited comments from Prada’s CEO indicating that the company is “looking at a dual listing on the Milan bourse.”
My opinion is that there are pros and cons relating to a potential dual listing for the company.
On one hand, a dual listing might help to diversify Prada’s shareholder base.
In the October 2023 Reuters piece referred to earlier, the company’s CEO highlighted that “some investment funds can only put money in European or U.S. stocks.” This implies that there are certain institutional investors who have an interest in owning Prada’s shares, but they are unable to invest in Prada because it only has a primary listing in Hong Kong for now.
On the other hand, Prada is now trading at reasonably fair valuations, so a Milan listing might not provide a significant uplift in the stock’s valuations.
Peer Valuation Comparison For Prada
Source: S&P Capital IQ
Although Prada has yet to execute on its dual listing, the company’s Hong Kong-listed shares are already trading at a forward P/E multiple that is on par with some of its key Europe-listed and US-listed peers. This means that even if Prada does list its shares in Milan, the expected valuation multiple expansion driven by the dual listing might not be that substantial.
There is no specific time line for Prada’s planned dual listing. This particular corporate action should allow Prada to have a more diversified shareholder base. But it is uncertain whether the stock will be able to command a significantly higher valuation following the completion of its Milan listing.
Closing Thoughts
My view of Prada remains mixed after considering the company’s proposed and potential corporate actions relating to retail store investments and a dual listing. More importantly, the market is now valuing Prada at a P/E ratio which is roughly in line with peers. As such, I still award a Hold rating to PRDSY now.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.