In the Sam Smith and Kim Petras Billboard Hot 100 No. 1 song, “Unholy,” alongside mentions of Balenciaga and Fendi, another luxury label gets a namecheck: Prada.
For the past seven years, Kering SA’s Gucci has dominated the music and handbag hit parades. But Prada, and sister brand Miu Miu, are now creeping back into popular consciousness. The Italian luxury group seems to finally be turning its fortunes around, thanks in part to its popularity with Gen Z.
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As the outlook for high-end goods darkens, however, the company must double down to continue its trajectory and focus on lifting its profitability.
Prada SpA burst on to the luxury scene in the mid-1980s, when Miuccia Prada began designing for her family’s accessories house and the company built on the success of her nylon rucksacks. It shifted its focus on aggressive expansion, particularly in Asia, even listing in Hong Kong in 2011. But soon after, it was hit by China’s crackdown on conspicuous consumption. It was also slow to believe that shoppers would purchase luxury goods via the internet.
The company posted five years of falling annual sales until 2018, and even then, its tepid growth led to speculation that the family, which controls 80% of the shares, could be forced to sell to LVMH Moet Hennessy Louis Vuitton SE or Kering.
Funnily enough, Prada’s resurgence has partly been fuelled by the zeitgeist for all things 1990s, when the fashion house was in its heyday. Not only was it quick to seize on interest for its 1990s nylon, but it gave the flagship product a sustainable makeover.
Indeed, its turnaround is down to more than luck. It has been investing heavily, more than €200 million ($194.9 million) last year, in its digital capabilities, store network and supply chain.
It’s also finally gotten ahead of family succession concerns. In a surprise move five years ago, Lorenzo Bertelli, eldest son of co-chief executive officers Miuccia Prada and Patrizio Bertelli, joined the business, bringing a focus on digital and sustainability. The 34-year-old, who is next in line to be CEO, spearheaded the Re-Nylon collection, made with recycled ocean plastic, fishing nets and textile industry waste. The nylon bag, a 1990s icon, was reborn with fully sustainable fabric, helping to propel Prada to a new, younger audience. It goes for £1,000 ($1,118) to £1,500.
And in 2020, Miuccia Prada brought in Raf Simons, the highly regarded Belgian designer, as her co-creative director. The pair has presented increasingly well-received collections since the start of their collaboration.
This is all paying off: Prada was the second hottest brand after Gucci in the third quarter, its highest-ever ranking in the Lyst Index, which measures searches on and off the Lyst fashion platform, as well as social media mentions. Miu Miu’s ballet flats were the most in-demand product.
Prada doesn’t deliver quarterly updates, but it is likely to have followed rival LVMH in enjoying strong sales in Europe as American tourists made the most of their muscular dollar.
Yet now it must continue its transformation against a backdrop of Chinese lockdowns and spiraling inflation in the US and Europe. That means ensuring the brand can hold its own against blockbuster names such as Louis Vuitton that shoppers tend to gravitate toward in uncertain times.
Prada’s plan to continue to invest €200-€250 million a year is wise. But it must also bolster profitability, which still lags rivals. The company is aiming to lift its underlying operating margin from 17.4% in the first half to at least 20% in the medium term.
Key to this will be translating its new found popularity into lucrative handbag sales. Across the industry, successful bags have historically generated gross margins of over 80%. Yet, at the moment, Prada is more exposed to fashion and shoes, and less to handbags, relative to LVMH for example, according to analysts at Bernstein. Leather goods accounted for about 51% of Prada group sales in 2021, leaving it plenty of room for expansion.
Prada is also under-invested in the US, with only 22% of sales from the Americas in the first half. In contrast, LVMH generated 27% of its sales from the US in the same period.
Coming up with more It bags, and bringing them closer to the price of Chanel and Hermes, could help Prada meet its ambitions even amid a slowdown. It’s the super-wealthy who are continuing to spend after all.
Prada shares have outperformed the MSCI World Textiles, Apparel & Luxury Goods Index this year. Investors clearly think the company can complete its turnaround and deliver a strong sales and profit performance thereafter.
There are indeed some grounds for optimism. Gucci is not firing on all cylinders right now. It typically does well when Prada is struggling, and vice versa. Meanwhile, a secondary listing in Milan could widen the pool of potential Prada investors.
But fashion is notoriously fickle. In the music charts, streaming means hits can hang around for months, if not years. That’s not the case when it comes to style.
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Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.