PRDSY Prada Spa (PK)

By Manuela Mesco 

MILAN--In late 2013, as the luxury sector was hitting the skids, Patrizio Bertelli was feeling bullish. The chief executive of Prada SpA and husband of designer Miuccia Prada announced plans to hire 400 new employees and open new factories--over the objections of senior lieutenants who said costs were already far too high.

"You just don't understand," he told them at a meeting, according to a person present. "I know what this company needs."

But Mr. Bertelli's push soon proved misguided. The fresh costs came just as sales of Ms. Prada's designs cooled, Asian growth was stalling and hunger for luxury megabrands was down.

The result: Net profit declined 28% in 2014, after a sixfold increase between 2009 and 2013. On Tuesday, the Milan fashion house--which controls its namesake brand, Miu Miu, Car Shoe and Church's--said high expenses pushed nine-month profit down 26% to EUR235 million ($258 million) compared with a year earlier.

Sales, which grew nearly 30% in 2012 and 9% in 2013, have also been declining. For the nine months ended Oct. 31, currency fluctuations helped sales rise 1.2% to EUR2.58 billion. Stripping out the currency effect, revenue would have declined 7%. In Tuesday's conference call, Chief Financial Officer Donatello Galli said Prada is working on "cost control at all levels."

Prada's recent travails have put Mr. Bertelli on the hot seat again. The Tuscan executive is regarded as one of the pioneers of luxury accessories and a business genius who created a global brand out of his wife's creative brilliance.

In the 1990s, he transformed Prada into a conglomerate, spending huge sums of money for brands such as Jil Sander AG, Helmut Lang, Azzedine Alaia and Fendi. But the acquisition binge left the company with debt nearly equal to its revenue in the early 2000s, forcing Mr. Bertelli to retreat, slashing costs and dumping much of what he had bought.

Now, he's retooling once more, as the brand loses some of its shine and costs have grown to more than half of sales. A breakneck expansion in stores--nearly doubling them in five years to more than 600--meant that it took too long for individual stores to get up and running and reach a break-even point, said Mario Ortelli, analyst at Bernstein.

The house even built mock stores to try out new interiors that cost nearly as much as building a new shop itself, a former executive said.

In an interview last week, Mr. Bertelli said the cost of the mock stores wasn't excessive, but he acknowledged the need to rein in Prada's heavy cost structure. While he is slowing store openings and sourcing shop fittings in low-cost countries like China, he said the Milan maison won't scrimp.

Costs "could seem high compared with our revenue," said Mr. Bertelli, but investments must continue even during difficult times. "I prefer to give up one point in operating profit but keep the company strong."

Mr. Bertelli, 68 years old, plans to use more digital advertising, but won't cut the house's overall ad budget. "It would be like cutting off a leg," he said. Prada must "make little savings without taking out anything from the industrial and commercial processes."

Like Gucci and Louis Vuitton, Prada has suffered from logo fatigue by shoppers who have increasingly shunned the big brands for more exclusive, unique bags and clothes such as Céline or Bottega Veneta. In response to a sales slowdown particularly pronounced for handbags, Prada is launching new products--for example, the "Inside" model that hit stores this summer and marked a push into higher-price goods.

Since early 2014, about a fifth of its sales now come from items costing at least EUR1,700, Mr. Bertelli recently said.

Mr. Bertelli formally shares the role of chief executive with his wife Miuccia, the designer of the house. However, he has for years been involved not only in the company's commercial and industrial strategy but also in the design and production, especially handbags.

"We have moved our products to a higher...luxury price point," he said in September. Last week, though, he added that less-expensive products will also be added.

But it could be tough to lure fashionistas away from Hermès or Chanel and sell them on more expensive bags from a brand that first build its success on nylon backpacks, according to Luca Solca, an analyst with Exane BNP Paribas.

More generally, Prada is suffering from growing pains following years of strong growth. Mr. Bertelli, who owns 80% of Prada along with Ms. Prada, has long run the house as a family concern and has been slow to develop a structure--including better production and delivery systems--more appropriate for its size, according to analysts and former executives.

Over the years, former employees and executives lamented the autocratic style of Mr. Bertelli, which has led several top executives to leave the firm, according to former employees.

Mr. Bertelli says executive turnover is normal for a growing company and he also delegates far more now--although he said during Tuesday's earnings presentation that he won't hire chiefs for individual brands, a typical model in other fashion conglomerates.

In the interview, he said he is working to equip the company with a better structure. For instance, management has improved production and logistical systems to make and deliver far more products to a bigger retail network.

Write to Manuela Mesco at manuela.mesco@wsj.com

(END) Dow Jones Newswires

December 15, 2015 13:59 ET (18:59 GMT)

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