Prada profit drops 44% on back of China sales slump

Prada reported first-quarter profit that trailed analysts' estimates as the maker of $695 clogs and $860 wallets struggled to reverse slumping sales in China.

Net income in the three months through April fell to €58.7 million from €105.3 million, the Milan- based group said Friday in a statement, well below analyst expectations for €85.2 million.

Prada, which has scaled back its retail expansion plan in response to tough trading conditions, said it would further cut its goal for net shop openings this year to 24-26 from 30 in a bid to shield margins. It is also introducing more bags priced between €1,000 and €1,200 as it attempts to reignite demand amid a clampdown on corruption and extravagance in China.

The weakness of the euro helped the maker of Miu Miu handbags achieve a 6.5 per cent rise in first-quarter sales to €828 million. But revenues were down 5.4 per cent when stripping out the boost from currencies. In particular, they fell 17 percent in the Asia-Pacific region, the group’s largest market, due to weak Chinese consumer spending as economic growth slows.

"Performance in this area has been affected mainly by the market conditions in Greater China, especially in Hong Kong and Macau, where the decline in Chinese tourist numbers, already seen in the second half of 2014, shows no signs of abating," Prada said in a statement.

The results are a "poor set of numbers," Luca Solca, an analyst at Exane BNP Paribas, said. While the weakness of the euro boosted revenue, it's also leading to "a major increase in retail-related costs".

Chief financial officer Donatello Galli told an analyst call he expected a rebound in China in the second half of the year. But if current trends persisted, previous "indications of flat margins [in the full-year] could be a bit challenging".

Weakness in the region that in recent years has been the luxury sector's growth engine is a headache for other big brands too. Sales at Gucci's own shops in Asia-Pacific fell 10 per cent in the first quarter, the Italian brand's owner Kering said in April. – Reuters / Bloomberg