China weakness drives Prada quarterly profit down 38 percent

HONG KONG/MILAN (Reuters) - Italian luxury goods maker Prada 1913.HK reported a 38 percent fall in quarterly profit on Tuesday, hit by slumping sales in Greater China as the country's economic growth slowed.

The Prada logo is pictured during the showcase of the Autumn/Winter 2014 collection at Milan Fashion Week February 20, 2014. REUTERS/Alessandro Bianchi

A weaker Chinese yuan following this summer’s devaluation of the currency also discouraged purchases by mainland Chinese tourists in Hong Kong, a traditional shopping hub, in the three months through October.

Europe and Japan were the only two areas that saw modest growth, thanks to tourists, while a strong dollar held back travelers headed to the United States.

“Market conditions are still quite complicated,” Chief Financial Officer Donatello Galli told an analyst call, pointing to unstable financial markets and concerns about global security that hurt tourism.

Prada posted a 6 percent drop in sales in August-October to 748 million euros ($819 million). Stripping out the boost from currencies, sales were down 10 percent -- with a 26 percent decline in Greater China.

Prada executives told analysts the group would reduce price gaps for its products across regions to discourage tourists from traveling to countries where goods can be bought more cheaply.

Nomura said in a note that pricing gaps are an issue that luxury brands need to address as customers’ awareness grows, but flagged likely pressure on profitability as companies reduce prices in high-margin Asian markets.

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To protect profit margins, Prada will consider selective shop closures in the coming year and limit the number of openings to 10, Galli said. As a comparison Prada had 54 net new openings in the year to Jan. 31, 2015.

Net income fell to 46.5 million euros in August-October from 74.47 million euros a year earlier. That was lower than analysts’ forecast of 77.8 million euros, according to Thomson Reuters SmartEstimate.

Sales of higher-margin leather goods dropped 11.6 percent as Prada, like other big brands, struggled to attract increasingly sophisticated luxury shoppers who now want less of a status symbol product and something more exclusive or niche.

“The company needs to carefully assess how they’re marketing and attracting the global Chinese consumer ... if they want to see a meaningful and durable uptick in sales in the future,” said Brian Buchwald, CEO of consumer intelligence firm Bomoda.

Shares in Prada closed up 0.2 percent on Tuesday. The shares have fallen nearly 40 percent this year compared with a 9.9 percent slide in the benchmark Hang Seng index .HSI.

Additional reporting by Meg Shen; Editing by Louise Heavens and Susan Fenton