Prada may be too reliant on golden couple

June 7, 2011

By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own .

HONG KONG — Prada’s value lies not just in its leather handbags — but its golden leaders. Patrizio Bertelli and Miuccia Prada, who run the business, account for a large chunk of the company’s earning power. But as Prada readies for its Hong Kong initial public offering, investors should remember that for luxury goods firms, an attachment to talented individuals cuts both ways.

The handbags-and-heels maker hopes its flotation on the Hong Kong stock market will secure a valuation as high as $15.8 billion. True, growth in Asia Pacific, which makes up a third of its retail sales, is prodigious — as are Prada’s expansion plans. Even stripping out the effect of new stores, revenues in China increased 50 percent in 2010.

Still, a price of 27 times forecast earnings for 2011 looks generous. That would mark a more than 20 percent premium to rival Burberry, another luxury house dominated by a single, Asia-friendly brand. LVMH, which is the biggest luxury goods firm and is more diversified, trades at 18 times.

Prada’s rating seems a stretch since investors are placing their faith not just on robust Chinese and Asian demand but on Prada’s top team of two. Bertelli, as chief executive, oversees supplier relations and deciding where to expand. His wife, Prada, heads a team of designers. A deputy chairman brings some counterbalance, but the kind of rigorous divisions found at Gucci and LVMH, where designers are shackled to accountants and strict performance targets, aren’t on show.
Granted, the Bertellis are unlikely to defect, as Tom Ford did from Gucci Group in 2004. Even after the float the couple will control the vast majority of the company’s stock. They are handsomely rewarded too: factor in their “consultant” roles, and the two can walk away with $15 million a year each. That’s close to Goldman Sachs boss Lloyd Blankfein’s haul for 2011, and without the restrictions on payments in cash.

But that doesn’t mean investors can ignore the people risk. Death, divorce or old-fashioned rows can also plunge luxury houses into crisis. Valentino and Versace both learned in different ways that strong succession planning is as essential as it is difficult. For houses reliant on one or two brands, the risk is even higher. Investors dazzled by the growth story should ask whether Prada’s top heavy leadership structure merits a slightly less glitzy IPO valuation.

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