Additionally, Prada’s major markets demonstrated robust growth where Europe and the Asia-Pacific region recorded YoY growth of 18% and 12%, respectively, at constant exchange rates. Meanwhile, Japan exhibited exceptional growth, with sales soaring 53% YoY to €466m, fuelled by solid local consumption and an influx of tourists. Following this update, Prada’s stock price reacted positively, rising 8% next day and was up over 11% since the announcement.

Founded in 1913 and headquartered in Milan, Prada is a leading global luxury fashion company and listed on the Hong-Kong Stock Exchange. Prada operates across three main segments: Retail sales (90% of 3Q24 revenue), wholesale (8%), and royalties (2%). Prada’s brand portfolio is led by Prada (74% of 3Q24 retail sales), Miu Miu (25%), and Church’s (1%), among others. With 26 owned factories and over 14,000 employees, the company operates in 70 countries with 593 directly operated stores, complemented by e-commerce channels, selected e-tailers, and department stores globally. In terms of regional distribution, Asia-Pacific accounted for 33% of Prada’s 3Q24 retail sales, followed by, Europe (32%), the Americas (17%), Japan (14%), and the Middle East (4%).

Prada outpaces the luxury goods sector

Prada operates within the luxury goods sector, specializing in high-end fashion, leather goods, footwear, and accessories offered at premium prices. The global luxury goods market has demonstrated consistent growth over the years, driven by rising disposable incomes, an expanding middle class in emerging markets, and increasing demand for premium products. With a CAGR of approximately 4-5% in recent years, the market’s value reached €353bn in 2022. Despite the sector’s resilience, 2024 proved to be a challenging year, marked by a 2% decline in overall sales, amounting to €363bn. However, Prada distinguished itself with an impressive 17% revenue growth, achieving €2.5bn in 1H24. This reflects Prada’s strategic focus on full-price sales, innovative initiatives and regional market emphasis.

Prada further enhances its market reach and brand visibility through licensing agreements. Notably, the company has extended its partnership with Essilor Luxottica until December 2030. This collaboration involves the production and global distribution of eyewear under the Prada brand.

Strong recover post COVID-19

Over the past three years, Prada has demonstrated a strong growth trajectory, achieving a robust CAGR of 25%, reaching €4.7bn in revenue for 2023. Sales saw a strong recovery in 2021, up 39% YoY, followed by a sharp decline of 25% in 2020 due to the COVID-19 pandemic. The recovery was driven by a surge in consumer demand, particularly in the Asia-Pacific region and enhanced digital channels. Prada’s revenue growth was further supported by strategic pricing and the success of flagship brands such as Miu Miu. The operating profit performance fared better during the same time, growing at a CAGR of 98% to €1.1bn in 2023, with margin of 22.5%, up from 5.6% in 2020, due to operational efficiencies and effective cost management. Additionally, Prada generated consistent positive FCF over the last three years driven by higher profits. Consequently, improving its Net Debt/EBITDA ratio to 1.1x in 2023, down significantly from 3.18x in 2020.

Similar trends have been seen in its European peers during the same time, Moncler and Brunello Cucinelli. Revenues grew at CAGR of over 27% for both the peers, reaching €2.98bn and €1.14bn respectively. Operating profit grew at CAGR of 34% and 114%, reaching €894mn and €602mn, with margin of 30% and 17% respectively.

Attractive valuation with strong outlook

Prada share price has increased by over 45% in the last 12 months. Despite this significant run-up, the company is currently trading at a P/E ratio of 24.1x, based on the FY24 estimated EPS of €0.32. This is lower than its 3-year historical average of 32.6x and the global peer average of 33.9x. Additionally, it is trading at an EV/EBIT of 17.1x, which is also trading lower than its 3-year historical average of 21.7x and global peer average of 22.3x. Out of the 21 analysts covering the stock, 12 have rated it as "Buy' and six as “Outperform". The average target price of €8.6 indicates an upside potential of around 11% from the current market price.

Analyst’s project Prada’s revenue to grown at a CAGR of 11.5% over the next three years, higher than its peers MONC’s 5.5% and Brunello’s 11%. Similarly, analysts expect Prada to register an operating profit CAGR of 14%, compared to MONC’s 4.5% and Brunello’s 12.5%. In addition, analysts anticipate a 200bps expansion in margins for Prada, reaching 24% by 2026. This compares to flat margins for MONC at 30% and just a 70bps improvement in Brunello’s margin, reaching 17% by 2026.

Overall, Prada’s positive outlook and strong fundamentals, present a good investment case. However, Prada faces risks including economic downturns, currency fluctuations, intense competition, supply chain disruptions, and the challenges of staying relevant in a fast-changing luxury market. Additionally, the brand must navigate issues such as regulatory compliance, sustainability pressures, geopolitical tensions, and the need to innovate while protecting its reputation and financial stability.