4Q results were a beat to us and consensus, with the quarter’s net revenue expanding by cFX +18.1%. The strength was mainly driven by 82% growth in Miu Miu (vs CMBIe 50%+). All regions marked robust growth, especially Japan (cFX +38%) and APAC (cFX +32%), when the US continued to record sequential improvement as we had expected. Another positive read from the results was a sequentially higher 2H23 GPM that reached 80.5%. This helped deliver a 0.9pp hoh increase in EBIT margins. During the analyst call, management confirmed positive sales momentum year-to-date that has extended from 4Q23. This is despite the challenging comparison base and normalized consumption demand in major developed markets. We have a BUY on Prada.
2024 outlook: Prada commented that sales in the first two months of the year maintained a consistent trajectory from 4Q23 (cFX +18.1%). This could suggest sales over the CNY were encouraging, when Miu Miu and Prada could continue to gain market share. Other than that, routine price hikes of 4-8% in the year will be implemented, with a particular focus on clothing and leather goods categories. We expect that Prada will outperform its peers in 2024 and achieve long-term margin expansion, supported by the sustained A&P investment at around 40% or higher.
Other key takeaways. In 2023, strong sales across regions and brands were the main driver of profit expansion, and this will be a trend to continue in 2024. By region, Japan remains a key market due to local and tourist demand, while the China cluster is likely to perform well with recovering outbound tourism to Europe (back to 70%+ vs 2019). For the US, the region will turn into another engine for growth going forward. Meanwhile, Prada is committed to long-term success by re-investing in its brands, albeit with lower EBIT margin than peers, and this strategic choice proved successful in 2023. Separately, the closure of outlet stores, which was initiated years ago, is progressing and now the segment only contributes c10% to Prada's overall sales. The segment will be entirely phased out in the next 2-3 years.
Earnings revision/Valuation. We refresh our 2024-25E estimates with the actual 4Q numbers and other house-keeping changes. We introduce our 2026E forecasts. Our TP is DCF-based. In our model, we assume 9.9% WACC which is based on 2.4% post-tax cost of debt and 10.8% cost of equity. For the latter, we align our risk premium to 8.5%, and beta to 0.9 by referring to Bloomberg estimates. Our terminal growth is set at 2%. Our TP implies 15.0x end-25E P/E, which remains lower than the ~18.0x global peer average.