Prada Store Closures to Offset Openings and Shield Profit Margins

MILAN, Italy — Italian fashion house Prada will offset new shop openings with selective closures this year and the next in an effort to shield profit margins from weaker demand.

The Milanese group reported on Friday a larger-than-expected drop in full-year profits. Earnings before interest and tax fell 28 percent in the 12 months through January to 14 percent of revenue from 20 percent a year before.

"I don't see a real change in the market trend," Prada chairman Carlo Mazzi told an analyst call on Monday.

"The problems of the market in terms of the world's economic situation and of changes...in consumers, especially the new generations...are quite clear for everybody."

Prada embarked on a breakneck retail expansion after listing on the Hong Kong bourse in 2011. It has been hit by China's economic slowdown and a crackdown on extravagant gift-giving in the country, where it reaps more than one fifth of its sales.

Luxury goods industry leader LVMH on Monday posted first-quarter sales below forecasts as tourist shopping in key markets including Hong Kong remained low.

Alessandra Cozzani, who took over in February as Prada chief financial officer after the sudden exit of long-standing chief financial officer Donatello Galli, said Prada would balance new openings with closures and work to keep operating expenses flat.

"The retail network ... will remain the same for sure in 2016 and probably also 2017. We're working on increasing the productivity of stores," she told analysts.

Prada had 618 directly operated shops as of Jan. 31 after 22 net openings in the year. Expensive shop leases have fed its cost base as sales stagnated.

Prada's retail sales fell 5 percent at constant currencies in 2015. The group has stopped publishing same-store sales but JPMorgan estimate they fell 9 percent in the fourth quarter.

It is also struggling to attract demand from consumers that increasingly turn on one hand to more affordable brands and on the other to more exclusive and niche names.

Prada Head of Strategic Marketing Stefano Cantino said the group would bet on e-commerce with a goal of doubling revenues over the next two years.

To this aim it will start working with partners such as Yoox Net-A-Porter to sell its products on multi-brand e-shops.

Digital and marketing initiatives will also be used to strengthen relationships with clients.

"Since we have fewer customers coming to our stores we have to treat them very well," Cantino said.

By Valentina Za; editor: Susan Thomas.