PRDSY Prada Spa (PK)

By Manuela Mesco and Jason Chow 

MILAN--China and Hong Kong were once Prada SpA's hottest areas for growth. Now, they're the biggest drag on slumping profits.

Prada's net profit fell by almost a quarter in the first half as sales slumped in China and Hong Kong--the once-booming region that has become the Achilles' heel for the entire luxury sector.

The Italian brand's sales in mainland China, like many others in the luxury industry, continue to struggle as Chinese consumers opt to shop in Europe and Japan where handbags and other luxury items are cheaper due to exchange rates and the lack of high import duties.

China's ongoing crackdown on corruption and gift-giving has also stymied demand in the market.

But Prada is particularly vulnerable to the China slump because its handbags and fashion are losing cachet. Local media in China reported that Prada was discounting at its stores, a practice typically avoided by high-end retailers to avoid hurting the brand.

Despite favorable exchange rates with a weak euro, the Italian fashion house is still struggling to get back on track after a number of weak quarters. Prada admitted the near future doesn't look very bright either.

"There's not going to be a huge improvement in the second half," Chief Financial Officer Donatello Galli told analysts. "But we're working in the right direction to cut expenses where we can."

Net profit stood at EUR188.6 million ($213.7 million) for the six months ended July 31. Revenue rose 4% from a year earlier to EUR1.8 billion, but was down 5.9% at constant exchange rates, underscoring the support that came from currency fluctuations during the period.

In the Asia Pacific region--a key area for all luxury brands and the largest single market for Prada, accounting for 36% of total sales--revenue was down 1.4% at current exchange rates and 17.5% lower at constant exchange rates. In Greater China, sales were down 1.2% at current rates and 19.3% lower at constant rates.

Hong Kong and Macau "failed to show any signs of recovery," the company said, and no improvement is seen in the short term. Macau, known best for its casinos, has been hurt by the Chinese government's antigraft campaign, while Hong Kong has fallen out of favor with Chinese tourists since the democracy protests of last year.

Other areas performed better. In the Americas, for example, sales grew 13.5% at current exchange rates and 6.1% at constant exchange rates. In Europe, revenue grew 4.9% at current rates, supported by tourist flows and a recovery in domestic demand, the fashion house said.

Several analysts say the Italian luxury house has also suffered from a lack of innovative products. To overcome the problem, Prada is working on the launch of new handbags--the category that has typically driven growth and has high margins. A new handbag, called Inside bag, was launched this summer, for example, and more products will come in the run up to Christmas, the firm said.

Prada is also working on cutting costs and streamlining processes such as buying and manufacturing. Mr. Galli said the company will continue to cut all unnecessary expenses, particularly promotional ones, but "not at a level where we harm the brand."

As Prada embarks on such cost-cuts, new stores openings will also slow down, starting from next year, said Chief Executive Patrizio Bertelli.

Write to Manuela Mesco at manuela.mesco@wsj.com and Jason Chow at jason.chow@wsj.com

(END) Dow Jones Newswires

September 15, 2015 11:37 ET (15:37 GMT)

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