A chance to purchase marked-down Prada

Miuccia Prada trained as a mime before she became the doyenne of Italian fashion, so it’s hardly surprising she’s adept at quietly telegraphing her vision through her designs.

By (Dow Jones)

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Published: Mon 28 May 2012, 3:53 PM

Last updated: Tue 7 Apr 2015, 12:55 PM

Not for her the logo-splattered aesthetic of Louis Vuitton, or the gaudy ostentation of Donatella Versace. But despite her impeccable taste, the house of Prada isn’t immune to market jitters, and the Hong Kong-listed shares of her family’s luxury empire have skidded nearly 20 per cent since early May.

Investors spooked by Europe’s deepening recession know that 37 per cent of Prada’s sales are done there. That figure, however, is misleading, because Europeans themselves account for just 17 per cent of the company’s sales. Instead, anyone who’s wandered into Prada flagships from London to Paris to Milan has seen the throngs of Asian tourists caressing the leather totes. In fact, non-Japanese Asians drive 57 per cent of Prada’s revenue, even though just 37 per cent is earned within non-Japan Asia, says HSBC. Another 10 per cent comes from Japan, and an additional two per cent from Japanese outside their homeland. Clearly, the Japanese don’t shop abroad like they used to.

Prada’s hold on Asian shoppers isn’t the only reason HSBC upgraded the stock last week. Same-store sales growth of 23 per cent last year points to higher market share, and Prada will open 80 new stores this year, up from 69 last year, with half of them in emerging markets, notes Erwan Rambourg, head of HSBC’s consumer and retail research. And Miu Miu, an offshoot targeting younger shoppers, is growing big enough for operating leverage to start kicking in.

Prada shares debuted last June at about HK$39.50 (US$5.06), retreated to HK$29 by October amid global recession fears, then rebounded this year. Investors are concerned that the Prada family might sell more shares when its lockup period expires next month. But any weakness this summer opens a door for buyers. For a start, the anemic euro — last week plumbing two-year lows against the dollar — is a boon for a global brand that rakes in so much abroad. Prada earns 78 per cent of its revenue at its own stores, which generate better margins than sales through department stores like Sak’s, and that percentage should soon exceed 83 per cent. Also, Prada gets 56 per cent of its revenue from leather goods and another 23 per cent from shoes; both categories boast bigger markups than clothing. In addition, its factory in Italy gives management tighter control over quality and costs.

Fashion is famously fickle, of course, but Prada is among its steadier stars. In prior decades, it took on a lot of debt to buy labels like Jill Sander and Helmut Lang, but those brands have since been sold. Prada now generates a lot of cash. Yet its shares, at their recent price below HK$46, were fetching 22 times projected profits. In contrast, Michael Kors Holdings (KORS)-based in Hong Kong but listed in New York since December — carries a rich 42 times multiple.

That’s high, even in high fashion. Since peaking at 10,255 in late March, the Nikkei has slid 16.3 per cent, to less than 8,600. Last week, it stretched its slide into an eighth straight week. Blame Japan’s deep, liquid markets-hedge funds fleeing risk find it an easy place to take profits, and Japan’s reputation for perennial value means investors aren’t afraid they might miss out on a big rally.

Noisy losses at Sony and Panasonic haven’t helped, and the lunge at safer assets has lifted the yen and spurred selling of exporters. With that, Japanese stocks are slumping at roughly 11 times projected profits, below the six-year average near 18.4 times. Yet many companies recently reported strong earnings, with domestic demand looking especially promising. “As a value investor, this is the kind of scenario that excites me,” says Steven Towns, author of Investing in Japan.

Take, for example, Nintendo, which trades below book value and whose stock-market value isn’t much more than the sum of its cash and marketable securities. “This means there’s essentially little to no value being ascribed to future earnings, let alone its iconic brand,” Towns says. Among companies forecasting strong to record profits for the new fiscal year are the convenience store operator Seven & I Holdings, the builder Daiwa House, the e-commerce retailer Rakuten, and diaper maker Unicharm.

In contrast, Chinese stocks have pulled back just 5.2 per cent since March, partly because investors expect shrinking exports and waning electricity generation to prod the central bank into swift action. David Walter, head of Asia research at Pacific Alternative Asset Management, an institutional fund of hedge funds, sees “additional support ‘in China’ from monetary easing, abating inflationary pressures, and the increasing likelihood that policy leaders will restimulate the economy.” He also expects mergers in Asia to accelerate as corporations use cheap funding to pursue strategic deals.


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