UPDATE 1-Europe drags Prada 2013 sales growth below estimates

Wed Feb 12, 2014 3:08pm EST

* Global sales grow 9 pct in 2013, from 29 pct rate in 2012

* Europe weighs, partly due to streamlining wholesale

* Prada sees "encouraging signs" in China

HONG KONG, Feb 12 (Reuters) - Italian fashion house Prada said on Wednesday sales growth slowed to 9 percent in the year ended Jan. 31, from 29 percent in the previous year, hurt by a weak European market.

The maker of luxury handbags, shoes and Miu Miu-branded dresses reported preliminary sales of 3.59 billion euros ($4.9 billion) for 2013, missing analysts' forecasts of around 3.67 billion euros.

European sales rose 5 percent on the year, slowing from 19 percent in Italy and 36 percent in the rest of Europe in the previous year, partly due to a process of closing wholesale accounts and focusing on the directly operated retail channel which typically returns higher profits for luxury brands.

The company had warned that European sales may be lower at the end of 2013 than in the previous year, but said on Wednesday it looked "forward with confidence" to 2014.

Prada opened 79 new stores last year, bringing it to 540.

This "aggressive rate" of store openings is likely to put pressure on the group's operating margin, Renaissance Capital analysts said in a note, although they predicted gross margins would reach an all-time high of 74.1 percent of sales in 2013.

Outside Europe, Prada said it saw "encouraging signs" from emerging markets including China, and that sales in Greater China rose 15 percent on the year at constant exchange rates.

Prada's optimism over China follows fellow Italian luxury group Tod's, which reported a surge in Chinese sales in 2013. Once red-hot domestic demand for luxury goods in general is cooling in China, contributing to an overall slowdown in the luxury market which the Boston Consulting Group calculates will grow 6-7 percent in the next three years from 11 percent in the previous three years.

"The market seems to us to underappreciate the Prada brand's ... superior brand momentum in particular in China," Citi said.

Sales grew 24 percent at constant exchange rates in Japan, but the yen's weakness against the euro meant this translated to 1 percent at current rates. The U.S. saw an 11 percent rise.

Renaissance Capital said it reduced its full-year estimates for Prada given the slightly lower revenue growth rate, although it maintained a "hold" rating on the stock.

Citi predicted consensus forecasts would come down, but reiterated its "buy" rating, partly based on the stock price, which has dropped 8 percent so far this year, and closed down a further 1 percent in Hong Kong on Wednesday at $63.65.

"The shares could continue to suffer near-term from quarter-on-quarter sales/earnings momentum deceleration," Citi said.

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