Prada confident on China, sees recovery in Europe

HONG KONG/MILAN (Reuters) - Prada is seeing green shoots in Europe and feels confident about China, its biggest market, even though sales slowed in the first half, the luxury Italian fashion house said on Tuesday.

The Hong Kong-listed group, whose first-half net profit fell short of expectations, said appetite for its colourful 1,500-euro leather handbags in China, particularly in second-tier cities where it was opening shops, was showing no sign of abating.

"China is performing in a very good way and growth is still very high," Chief Financial Officer Donatello Galli said on a conference call on Prada's first-half results. He said investment plans in the country remained unchanged.

Sales growth in Greater China, including Hong Kong, slowed to 20 percent in the first half from 35 percent a year ago.

Chinese luxury spending has been hit by a government crackdown on gift-giving and conspicuous spending, affecting luxury goods, including upmarket watchmakers and designer handbag brands.

Greater China, including Hong Kong, makes up 21 percent of Prada's revenue.

In Italy, which accounts for 18 percent of total sales, Prada said the sales decline at its shops had slowed down but it was too early to say its home market had turned a corner.

"In terms of domestic demand in Italy I think it is too early to say if we reached a bottom," Galli said.

For Europe as a whole, Galli said the brand had seen an increase in tourist spending and the economy was showing signs of a very gradual recovery.

Galli said summer trading was good and sales growth in August was actually better in like-for-like terms than during the second quarter. But he noted that demand in the first 10 days of September proved softer in both Asia and Europe and suggested events in Syria and elsewhere in the Middle East were affecting tourist travel.

Prada, which had 491 directly operated stores at end-July, plans to open around 80 shops in total this year and next, and enter new markets such as Kazakhstan after Morocco and Qatar.

The Prada brand, which generates more than 83 percent of group turnover, had a 12 percent rise in second quarter sales, while revenues from smaller brand Miu Miu were up 3 percent.

An improved product mix together with solid growth in Asia and fewer mark-downs helped Prada lift its operating margin to 26.5 percent from 25.5 percent in the first half.

The company's 15 percent second-quarter net sales growth at constant exchange rates puts it on par with French luxury peer Hermes which reported a 16 percent jump in its own second quarter sales.

Prada reported a near 8 percent increase in net profit for the six months ended July. The 308 million euros profit slightly lagged a 321.3 million euros average forecast by five analysts polled by Thomson Reuters.

Its shares have risen 8 percent so far this year, underperforming the luxury sector average which gained 18 percent, partly because the stock's relatively high valuation.

Prada, at 23.6 times forward earnings, is more expensive than Burberry and LVMH but earnings growth expectations are higher: on average, analysts expect Prada's earnings to grow a fifth next year, or about 50 percent faster than LVMH or Burberry. (Reporting by Donny Kwok and Miral Fahmy, in Hong Kong, Astrid Wendlandt in Paris and Isla Binnie in Milan, Additional reporting by Vikram Subhedar and Alexandra Hoegberg in Hong Kong. Editing by Jane Merriman)

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