Morningstar | Prada's Pricing Power and Control Over Distribution Grants It a Narrow Moat
Prada is one of the most recognised and best-loved luxury brands and is an important design authority. It has developed a global retail network of over 600 stores for Prada and Miu Miu, many of which are in important travel locations. Although dilutive to returns in the short run (return on invested capital currently at 5.7%, versus 13.6% in 2013), control over distribution strengthened the company's brand moat--showcasing the brand, avoiding excessive discounting, and maintaining strong negotiating clout with wholesalers. As the retail infrastructure has been built out and new demand comes from existing stores, operating costs should be leveraged. Prada is a relatively late adopter of digital distribution and marketing channels (e-commerce accounts for low-single-digit levels of sales versus 10% for the industry). These channels will need capital investments in the short term (at a lower rate than prior-year retail expansion) but could become quite profitable over time. We expect Prada to return to growth after years of industry underperformance, consistent with our narrow moat rating. We believe several factors drove the underperformance: disproportionate investments in local Asian channels, which have slowed; a high focus on the lucrative leather goods segment, where iconic shapes/products have started to underperform (lower recurring demand and slowing cyclical growth with increased competition); and subpar merchandising. Luxury brands go through ups and downs, and we don’t see any of these issues as beyond repair. We believe that Prada has great assets to build on (global brand recognition and 80% distribution control) and that it can return to growth driven by new product introductions to engage existing and new consumers, better merchandising decisions, and development of the online channel in terms of both marketing and distribution. Still, the recovery may require time and a moderately favourable macroeconomic backdrop.PRADA is engaged the luxury goods sector where it operates with the Prada, Miu Miu, Church's and Car Shoe brands in the design, production and distribution of luxury handbags, leather goods, footwear, apparel and accessories. Co. also operates, under licensing agreements, in the eyewear, fragrances and mobile telephone sectors. Co.'s products are sold in 70 countries worldwide through a network that included 540 Directly Operated Stores (DOS), and a select network of luxury department stores, independent retailers and franchise stores.
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