Prada sees the end of the Tunnel

Have it hit the bottom? Have we seen the worst? These are the questions many investors are now doing regarding Prada. After two very difficult years for the business and especially for its shares, we could be seeing the first steps in what would be its recovery.

Let´s look back. In June 2011 the company went public on the Hong Kong Stock Exchange with a reference price of HK$ 39.5. It was the first luxury fashion company of the Hong Kong market and aroused great interest among investors by favorable prospects for the company and for the luxury sector in general. Obviously, this interest was reflected in the evolution of its market value. Less than two years after its valuation had doubled, to comfortably exceed HK$ 80 per share.

From there, the business expectations began to worsen, painfully reflected in its market value, probably because the market was expecting more from the company than the luxury sector as a whole. The share entered in a downward spiral that led it to lose half its market value, driven by the progressive deterioration of its forecasts, a situation that bottomed with civic protests in Hong Kong. It dropped to HK$ 41 per share last month, almost the same level at which it went public over 3 years ago.

Changing of Scenery? Despite the above, in the atmosphere are floating some change feelings. For the first time in several quarters, the consensus expects an increase in the sales growth rate this year following the evolution of the business in the last fiscal year. Sales fell 1% to €3.55 billion, slightly lower than expected.

Although a priori this may sound bad, the truth is that hinted good news. Sales rose 8% in Japan and America, while fell by 1% in Europe (which was expected due to slower growth and the decline in tourism from Russia), and fell 5% in Asia, also an expected development by protests in HK and the limitations established in Macao by the Chinese government.

To improve earnings, the company will open fewer stores this fiscal year, will perform a repositioning of the brand in Japan and US and especially plans to launch a line of handbags in the middle-luxury segment, with a cost around €1,000 (keeping in mind that the high segment exceeds €2,500 per bag). This has the potential to become a major boost for sales in certain markets.

At current prices, around HK$ 45 per share, the company trades at a PE of about 26 times, which is still high compared to the industry average. However, it is evident -because of their history on the stock exchange- that investors are willing to pay a premium for being present in its capital, so do not think there can be a downside to see a recovery in value. The dividend yield of around 2.5%, is a plus to invest in the stock.

Disclosure: The author is not responsible for the views expressed in the article. The text has been written freely expressing ideas, without receiving any compensation. The author has no business relationship with any of the companies whose shares are listed in this article.