Prada is expensive even after price cut

Poor first-half results suggest the iconic Milanese label is losing share to Gucci and Louis Vuitton


Prada’s handbags aren’t the ones to buy this year. Neither are its shares, which look expensive even after a 12 % plunge on September 11, 2017

The iconic Milanese fashion label released poor first-half results after its Hong Kong-listed shares stopped trading Friday, giving investors a weekend to mull them over. Profits fell by more than fifth for the six months through July, compared to a year earlier, mainly due to lower sales in an industry that finds it hard to trim costs.

This has little to do with the wider market, which has roared back to health this year. Instead, Prada has been outsold by Louis Vuitton and Gucci. Prada’s constant-currency sales were down 5.7 %. For the half through June LVMH , which owns Louis Vuitton, reported 14 % constant-currency growth in its fashion and leather goods business, while comparable sales at Gucci were up an astonishing 43 %, according to its parent group Kering.

Louis Vuitton emphasizes its heritage, while Gucci has reinvented its look under new creative director Alessandro Michele. Prada seems to be caught between these two success stories, neither as fashionable as Gucci nor as timeless as Louis Vuitton. Being late to invest in online sales and marketing hasn’t helped.

Big fashion brands tend to go through cycles of saturation and reinvention. Sales at Prada could bounce back in the end, and if they do the company has huge scope to improve its operating margin, which at 11.4 % is low by industry standards.

But the latest numbers make it hard to see this happening soon enough to justify the high share price. This sits at 20 times consensus earnings estimates, according to FactSet, but more downgrades are to come; using Bernstein’s already-reduced forecast for the current year the multiple is 26 times, a premium to peers.

Quality matters in luxury, but in the case of Prada’s stock, you don’t get what you pay for.