Prada and Miu Miu on the Right Side of Fashion Cycle As Revenue and Profits Rise; Shares Expensive

We expect to increase our fair value estimate for narrow-moat Prada 01913 by a low-double-digit rate to incorporate stronger-than-expected revenue growth and faster margin expansion than we anticipated in 2022 and over the next several years. We still view shares as expensive at current levels, trading at almost 30 times forward earnings, as our valuation already incorporates continued margin expansion.

In 2022 the company’s revenue grew by 21% at constant exchange rates (with a balanced contribution from volumes and price effect), and stronger than the 15% constant-currency growth for the luxury industry. We believe Prada continues to benefit from improved brand momentum (Prada and Miu Miu are in the Top 5 of Lyst Index, an online brand popularity ranking). We believe Prada’s popularity has been on an upswing since 2020 as it was enjoying stronger revenue trends compared with the rest of the luxury industry, thanks to new creative impetus from the creative leadership team of Miuccia Prada and Raf Simons, improved digital strategy, and discount limitations that helped elevate the brand. As our prior experience shows, fashion cycles in luxury can last for around five years, so we could expect continued industry outperformance in the few upcoming years before eventual normalization.

Adjusted operating margin was 20.1% in 2022, up from 14.5%, already reaching the company’s midterm target announced at its capital markets day in 2021. This was a result of strong gross margin expansion of 310 basis points driven by pricing, higher in-sourcing and manufacturing efficiencies, and operating leverage. Although management signalled there may not be much upside for gross margin (already at a record 78.8% and among the strongest among listed peers), the operating margin could benefit from improved sales densities, which we believe remains below big peers.