Analyst Note| Jelena Sokolova, CFA |
We maintain our fair value for narrow-moat Prada after attending the company’s capital markets day, or CMD, on Nov. 18. During the event the company announced its "midterm" financial targets (no precise time reference for midterm) of EUR 4.5 billion in revenue and EBIT margin target of around 20%. Our current model calls for this level of revenue by 2026, implying high-single-digit revenue growth post-2021, with the EBIT margin exceeding 20% by 2025. The company stuck to its gross margin target of 78% (72% over the past five years and 76% in third-quarter 2021). We have previously struggled to see the sources of further gross margin progression given the already very high penetration of own retail (more than 90%) and very low discounting (full price almost 100% of sales currently). During the CMD the company provided more color on sources of margin expansion. Notably it comes from manufacturing efficiencies: the number of SKUs has been reduced by 30% since 2019, with further room for reduction, leading to less inventory, less manufacturing complexity and more scale. The production cycle has also been shortened by 30%, which should help be more reactive to the demand on the upside and downside. In-house manufacturing has been increased to 40% for leather goods (20%-25% in 2017) and could grow further to 60%, boosting margin. Finally, pricing power could be maintained in the years to come, given improving brand momentum. While we now see more paths for further gross margin expansion, we believe those are also currently positively affected by a number of transitory tailwinds from increased consumer demand and still tight cost controls.