Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

All the glitter of a Prada slingback shoe is not gold.

Investors have flocked into luxury stocks over the past year, as the sector has recovered. But Prada SpA demonstrated on Friday that the revival has not been evenly spread.

The Italian group warned that while it was making progress in revitalizing its fortunes after an over-expansion and too much reliance on Asia, its turnaround plan may take longer than expected. The shares fell 14 percent in Hong Kong on Monday, the biggest drop since 2011.

The company blamed year-on-year declines in first-half revenue and net income on a range of factors, from its Fifth Avenue store being disrupted by demonstrators against President Donald Trump, to slower spending in Europe due to the strong euro, and missing out on the trend for high-end sneakers.

But the chief culprit was a digital capability that lags behind LVMH and other luxury groups, which have been expanding their online prowess as consumers become more comfortable with buying high-value items online.

Racing Ahead
Growth in online luxury sales is outpacing that of the broader market
Source: Bain & Company, Altagamma

Prada is now playing catch up. It plans to roll out its online sales platform globally by the end of 2018 and increase the proportion of its marketing spend dedicated to digital media from close to 30 percent this year to 40 percent next year.

But even so, Prada estimates that this should take the proportion of its sales from digital to 5 percent in the period. That's a poor comparison to the total market -- analysts at Exane BNP Paribas forecast online to account for about 10 percent of total luxury sales.

Digital Direction
Consumers are becoming more comfortable with buying high end products via the internet
Source: Bain & Co, Altagamma, Exane BNP Paribas
2017 and 2020 are Exane forecasts

Style slippage at the brand should spur it to take a lesson from Burberry Group Plc. As the British company has shown, the whizziest online offerings are not of much use if shoppers don't want to splash out on the latest bag. 

True, there are some glimmers of hope at Prada. It sold fewer products on markdown, so increasing its gross margin to 74.1 percent, from 72.2 percent in the year earlier period. Meanwhile, its brand strength is recovering, according to research from Exane. That could point to improvement in the second half.

But the competition is relentless, with Gucci showing no signs of losing momentum. LVMH and Hermes International continue to appeal in the crucial leather goods category.

As Gadfly has noted, while most luxury groups have enjoyed a resurgence in sales over the past year, conditions could become more challenging. Concerns that stock markets are near their peaks, geopolitical tensions and a revival of terrorist fears in Europe could all weigh on the sector.

Prada Premium
The Italian luxury house is valued at a premium to the broader index despite its sales growth lagging some rivals
Source: Bloomberg

Even after Monday's tumble, the shares trade on a forward price earnings ratio of 20 times, at a premium to the Bloomberg Intelligence Luxury Peer Group. That indicates that even if Prada does manage to regain its luxury luster, which is by no means guaranteed, that's already reflected in the valuation. And if the sector does take a turn, it's less well placed to weather the storm.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net