Prada's margins worsen to -550bp in Q2

Blame it on a difficult retail environment.

Barclays has rated Prada stocks Underweight due to its belief that negative earnings momentum will continue on the back of a difficult retail environment, with increasing competition in leather goods and Q2 15 results backing this view.

According to a research note from Barclays, while sales were already announced, margins were always a risk owing to the operating deleverage in the business – in particular with an estimated -4% decline in like for like sales.

Q2 margins fell -550bp (Barclays -330bp) with GM -300bp and Opex increased 240bp. Guidance is also weak with H2 revenue growth targeted to be in line with H1 (c4.5% organic) and margins still under pressure.

Here's more from Barclays:

August/September was said to show no pick-up in the negative trends. Overall we cut 2015E EPS by 10% to €0.21 and 2016E by 8% to €0.24 – we were already 4% below consensus.

We cut our PT in line with earnings to HKD43 from HKD46. We retain our Underweight rating on Prada with the stock trading at 22.5x cal 2015E PE – preferring Kering (Overweight) among luxury goods stocks at just 14.5x 2015E PE.

Q2 margins weak: With sales already announced, today’s figures focused on margins and guidance. EBIT came in at €217m (Barclays €238m, Reuters consensus €245.6m) with net income at €140m (Barclays €171m, Reuters consensus €172.3m).

EBIT margin fell 550bp – but with a completely different mix to Q1. Gross margin fell 300bp compared with Q1 +40bp.

This was due to the impact of FX but mainly the channel mix, with wholesale bouncing back with a lower margin. Opex increased 240bp v 530bp in Q1.

Guidance downbeat: New guidance is for sales to be broadly in line with the first half. Margins will continue to be under pressure with some marginal improvements from the cost savings.

We have applied similar H2 organic growth at 4.5%, assumed a -10bp reduction in GM assuming flat wholesale sales with opex up 340bp (H1 370bp).

This gives EBIT of €810m for FY 15E from €866m previously (down -6%). Valuation: Prada trades at 22.5x cal 2015E PE. Our new price target of HKD43 is based on the current sector average PE of 17x, and has been cut in line with earnings.