The Prada Group. Orly Brooker Financial Accounting Summer Semester Annual-Report-2012.

Transcription

1 The Prada Group Orly Brooker Financial Accounting Summer Semester Annual-Report-2012.pdf

2 Introduction Chief Executive Officer: Patrizio Bertelli Location of Home Office: Via A. Fogazzaro, 28; Milan, Italy Ending date of last fiscal year: January 31 st, 2013 Principal Products: The PRADA Group is one of the world s leaders in the design, production and distribution of luxury handbags, leather goods, footwear, ready-to-wear apparel, accessories, eyewear and fragrances. The Group owns some of the most prestigious international brands: Prada, Miu Miu, Car Shoes and Church s. Main Area of Activity: The Prada Group saw the most sales in the Asia Pacific area (1,160,166 in thousands of Euro out of Net Sales of 3,297,219 in thousands of Euro)

3 Audit Report Independent Auditors: Deloitte & Touche S.p.A. In the Independent Auditors Report, the auditors stated, after a careful and meticulous review, that the Prada Group s financial statements were prepared according to the International Financial Reporting Standards of the European Union, present a fair look at the company s financial position as of January 31 st, 3013, and line up with the company s internal system of operations (management).

4 Stock Market Information (for the Prada Group stock, traded on the HKSE, stock code 1913) Most Recent Stock Price: $74.85 Hong Kong Dollars Twelve Month Trading Range: High at $82.30 on 3/11/2013 Low at $42.90 on 6/4/2012 Dividend per Share: $0.9 per share (EUR million final dividend) Date of Information: May 31 st, 2013 I would either buy shares of this company s stock or hold them. The Prada Group s stock appears based on the above information to be rising in value, so I would either invest long-term in the company by purchasing roughly 20-50% ownership now as stock is rising, or I would wait to see if it might rise any higher before selling any previously purchased shares (if I had been holding investments in the short term, such as trading securities or available for sale securities).

5 Income Statement (from the consolidated financial statement of the Prada Group)

6 Income Statement cont. The above income statement is presented in a multistep format, meaning not all revenue accounts and expense accounts are listed together. Instead, net revenue is listed first (income from operations/sales), and cost of goods sold is subtracted, leaving us with the company s gross profit. Operating expenses (selling, administrative, general) were then subtracted to give the operating income of the company, and other revenues and expenses (interest, dividends) were added/subtracted to give income before taxes, and a final net income from continuing operations of $633,277 in thousands of Euros. The Prada Group s net revenues increased by approximately $741,673 thousand Euros during the 2012 fiscal year, over a 29% increase from 2011, leading to an increase in gross margin, which reflects positively on the growth of the company and its continued ability to generate sales. Furthermore, the Prada Group saw an increase in net income from continuing operations from the fiscal year ending 1/31/2012 to 1/31/2013 of approximately $196,852 thousand Euros, also displaying a positive trend in the company s growth.

7 Balance Sheet (from the consolidated financial statement of the Prada Group)

8 Balance Sheet

9 Balance Sheet The changes seen in the key balance sheet accounts generally denoted positive growth for the Prada Group. Its net current assets saw an increase, its total liabilities saw a slight decrease, and its shareholders equity saw a large increase (showing that stock ownership in the company is increasing, hence it is seen as a beneficial and worthwhile investment). Most noteworthy are the changes in the total assets and noncurrent liability accounts. Total assets increased by approximately 15% mainly due to cash and trade receivable increases. While total current liabilities saw a slight increase, meaning the company has more promises and responsibilities to fulfill in the near future, total non-current liabilities saw a significant decrease, mainly due to a decreasing long-term financial payables account. This shows that the Prada Group has been able to debit this account buy starting to pay what it owes in terms of financing activities. This further proves the positive financial standing of the company and would appear favorable in the eyes of potential investors.

10 Statement of Cash Flows (from the consolidated financial statement of the Prada Group)

11 Statement of Cash Flows

12 Statement of Cash Flows During the 2011 and 2012 fiscal years, the Prada Group s net cash flows from operations were greater than net income. Cash flows from operations have been more than net income for the past two years, but the difference between the two saw a large increase in In 2011, cash flow from operations was greater than than net income by $43,529 thousand Euros. In 2012, the difference was $125,995 thousand Euros. The company has been growing mainly due to sales as opposed to through investing activities, highlighting the Group s focus on and commitment to effective sales efforts; however, the Group made significant investments in the purchase of PP&E during The company s primary source of financing was from new long term borrowings arranged ($70,627 thousand Euros in cash). It s significant to note that most all other cash financing accounts in 2012 showed a decrease, i.e. outflow of cash, so cash paid for financing activities greatly increased. The company paid off accounts such as repayment of short-term potion of long-term borrowings, contributing to the overall outflow of cash due to financing activities. This could be a display of the Prada Group choosing to pay off many liabilities in the year that it achieved such high sales numbers. Closing cash and cash equivalents has seen an overall increase over the past two years from $353,554 thousand Euros to $571,222 thousand Euros, a $218,168 thousand Euros difference.

13 Accounting Policies (cash, revenue, investments) Cash and cash equivalents are carried in the statement of financial position at nominal amount. Cash equivalents include all highly liquid investments with an original maturity of three months or less. For the purposes of the cash flow statement only, cash and cash equivalents comprise cash on hand, bank accounts and deposit accounts. Revenues from the sale of goods are recognized in the income statement when the risks and rewards of ownership are transferred to the buyer; the value of the revenues can be reliably measured; all control over the goods sold has ceased; the economic benefits generated by the transaction will probably be enjoyed by the Company; the costs pertaining to the transaction can be reliably measured. Investments in associated undertakings and joint ventures are accounted for under the equity method of accounting. Any goodwill included in the historical cost of the investment is tested annually for impairment. The parent company s share of the profit or loss of the investee is recorded in its income statement. Dividends received from the investee company reduce the carrying amount of the investment. If a subsidiary uses accounting policies other than IFRS, adjustments are made to bring its accounting policies into line with those of the parent company.

14 Accounting Policies (accts. receivable, PP&E, inventory) Trade accounts receivable are carried at nominal amount less the provision for doubtful accounts, estimated based on an assessment of all disputed and doubtful balances at the reporting date. Bad debts are written off when identified. Raw materials, work in progress and finished products are recorded at the lower of acquisition cost, production cost and net realizable value. Cost comprises direct production costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Provisions, adjusting the value of the inventory, are made for slow moving, obsolete inventories and if the estimated selling price is lower than cost. Property, plant and equipment are recorded at purchase cost or production cost, including any charges directly attributable. They are shown net of accumulated depreciation calculated on the basis of the useful lives of the assets and any impairment losses. Interest costs on borrowings are capitalized to increase the value of the asset. The costs included under leasehold improvements relate to refurbishment work carried out on assets not owned by the Group. All costs incurred during the period between the start of refurbishment work and the opening of the store are capitalized as leasehold improvements.

15 Accounting Policies cont. (notes topics) 1.General information 2. Basis of preparation 3. Amendments to IFRS 4. Scope of consolidation 5. Basis of consolidation 6. Main accounting policies 7. Acquisition, disinvestments, and incorporation of subsidiaries 8. Operating segments 9. Cash and cash equivalents 10. Trade receivables, net 11. Inventories, net 12. Derivative financial instruments: assets and liabilities 13. Receivables and advance payments from parent companies and other related parties 14. Other current assets

16 Accounting Policies cont. (notes topics) 15. Property, plant and equipment 16. Intangible assets 17. Investments 18. Other non-current assets 19. Short-term financial payables and bank overdrafts 20. Payables to parent companies and other related parties 21. Trade payables 22. Tax payables 23. Obligations under finance leases 24. Other current liabilities 25. Long-term financial payables 26. Long-term employee benefits 27. Provisions for risks and charges 28. Other non-current liabilities

17 Accounting Policies cont. (notes topics) 29. Shareholders equity - Group 30. Shareholders equity 31. Net revenues 32. Cost of goods sold 33. Operating costs 34. Interest and other financial income/(expenses), net 35. Income taxes 36. Earnings and Dividends per share 37. Additional information 38. Remuneration of Board of Directors, five highest paid individuals and Senior Management 39. Transactions with related parties 40. Commitments Financial summary Definitions 43. Consolidated companies 44. Events after the reporting period

18 Liquidity Ratios 2011 Working Capital: 1,117, ,584=$400,9191 It appears the company was in a position to quickly acquire cash (i.e. liquid). Current Ratio: 1,117,503/716,584 =1.56 It appears the company was liquid enough to cover current liabilities with current assets. Receivable Turnover: 2,555,506(SALES)/(266, ,175/2)(Avg. AR)=9.45 This suggests that credit granting and collecting activities were relatively successful. Avg. days sales uncollected: 365/9.45=39 days Revenue was collected relatively quickly. Inventory Turnover: 727,581(COGS)/((374, , 409)/2)(Avg. Inven.)=2.22 This suggests that inventory cycled through operations relatively efficiently. Avg. day s invt. on hand: 365/2.22=164 days Inventory was held for a lengthy period, but this is to be expected for luxury retail. Operating cycle: 39 days days=203 days. Note that this is less than a year.

19 Liquidity Ratios 2012 Working Capital: 1,387, ,062=$645,387 It appears the company is in an even better position to quickly acquire cash (i.e. liquid) than in the previous year. Current Ratio: 1,387,449/742,062=1.87 It appears the company is slightly more liquid, in a better position to cover current liabilities with current assets. Receivable Turnover: 3,297,219(SALES)/(304, ,404/2 )(Avg. AR)=11.55 This suggests that credit granting and collecting activities were more successful that the previous year, and efficient overall. Avg. days sales uncollected: 365/11.55=37 days Revenue was collected slightly faster than the previous year, and relatively quickly. Inventory Turnover: 920,678/((343, ,782)/2)= 2.56 This suggests that inventory cycled through operations faster and more efficiently that the previous year. Avg. day s invt. on hand: 365/2.56=143 days Inventory was held for less than in the previous year (still lengthy, but to be expected for luxury retail). Operating cycle: 37 days days=180 days. The cycle is shorter than the previous year. Note that this is still less than a year.

20 Profitability Ratios 2011 Profit Margin: 436,425/2,555,606=0.17 x 100=16% This shows that 17 cents of every dollar of sales was a profit, which is not particularly high, but does indicate profitability. Asset Turnover: 2,555,606/((2,943,568+2,366,01 5)/2)=0.96 This indicates that the company was using their resources to generate sales in a very efficient manner. Return on Assets: 436,425/((2,943,568+2,366,015) /2)=0.16 x 100=16% This indicates that total assets were somewhat profitable. Return on Equity: 436,425/((1,822,743+1,204,350) /2)=0.28x100=28% This indicates that shareholders investments contributed significantly to profit.

21 Profitability Ratios 2012 Profit Margin: 633,277/3,297,219=0.19 x 100=19% This shows that 19 cents of every dollar of sales was a profit, which is not particularly high, but does indicate profitability. It is two cents higher than the previous year. Asset Turnover: 3,297,219/((3,385,279+2,943, 568)/2)=1.04 This indicates that the company was using their resources to generate sales in a very efficient manner, even more so than the previous year. Return on Assets: 633,277/((3,385,279+2,943,5 68)/2)=0.20 x 100=20% This indicates that total assets were relatively profitable, slightly more than the previous year. Return on Equity: 633,277/((2,320,022+1,822,7 43)=0.31x100=31% This indicates that shareholders investments contributed significantly to profit, although slightly less than the previous year.

22 Market Strength year end 12/31/2011 Price/earnings per share 625,681,459 (group net income in euro)/2,535,777,885(avg. shares outstanding) =.17 This shows that the company s common stock represents strong investment potential. Dividend yield (5.0 Euro/cents)/35.15=0.14 This shows a small cash return on shareholders investments, but this is relatively normal for a fast growing company. *Note: On May 26, 2011, a Shareholders Meeting of PRADA spa resolved to change the par value of the Company s shares from Euro 1 to Euro 0.1 each. In accordance with IAS 33, the number of shares in issue in 2010 was retrospectively adjusted for the purposes of the calculation of earnings per share.

23 Market Strength year end 12/31/2012 Price/earnings per share: 625,681,459 (group net income in Euro)/.2,558,824,000(avg. shares outstanding)=.245 This shows that the company s common stock investment potential increased significantly from the previous year. *Note: On May 26, 2011, a Shareholders Meeting of PRADA spa resolved to change the par value of the Company s shares from Euro 1 to Euro 0.1 each. In accordance with IAS 33, the number of shares in issue in 2010 was retrospectively adjusted for the purposes of the calculation of earnings per share. Dividend yield: (9.0 Euro/cents)/73.95=0.12 This shows a small cash return on stockholders investment, but this is relatively normal for a fast growing company.

24 Solvency Ratios 2011 Debt to Equity: 1,112,601/2,226,984=0.50 This indicates that the shareholders, not the creditors, exert primary control in the company. This is a positive sign in terms of solvency. Financing Gap: Days Payable: (283,538(total accts. payable)/727,581 (COGS))x365=142 days Because the 2012 operating cycle was 203 days, the company experienced a financing gap of 61 days ; it was not able to self-finance, i.e. it had to borrow money to pay suppliers. However, the gap was not particularly enormous, and somewhat of a gap is relatively normal for luxury retailers. This does necessarily signify that the company may be in trouble financially.

25 Solvency Ratios 2012 Debt to Equity: 1,054,787/2,320,022=0452 This indicates that the shareholders, not the creditors, exert primary control in the company (even more than the previous year!). This is a positive sign in terms of solvency, showing that the shareholders exert more control this fiscal year than the last. It serves as a positive sign for the Prada Group in terms of its shareholders equity and long-term liabilities position. It is a number that looks positive for potential investors. Financing Gap: Days Payable (845,720 (total accts. payable)/920,678(cogs))x365= 131 days Because the 2013 operating cycle was 180 days, the company did experienced a financing gap of 49 days (shorter than the previous year); it was not able to self-finance, i.e. it had to borrow money to pay suppliers. However, the gap was not particularly enormous, and somewhat of a gap is relatively normal for luxury retailers. This does not in any way signify that the company may be in trouble financially.

26 Industry Situation & In its annual report, the Prada Group emphasized its commitment to creating a certain style, one that extends well beyond purely the physical manufacturing of the products for which the Group is known. The Group cites interest and careful observation of the world in allowing it to achieve the originality and innovation that has, in turn, resulted in a new way of creating fashion. -Annual-Report-2012.pdf Company Plans It is this outlook that has served as the basis of the Prada Group s activity and has led to the success of the Group s brands; Prada, Miu Miu, Church s and Car Shoes. The Group maintains its dedication to quality and superb craftsmanship, which it insists results in an exclusive relationship between each customer and the Prada Group brands and represents a core tenant behind the Group s continued success. -Annual-Report-2012.pdf

27 Industry Situation & Company Plans Based on the financial success its past fiscal year, the Prada Group expressed plans to continue with the brand positioning and retail expansion strategies it has been employing in recent years. The Group maintains its conviction that these strategies will again prove successful despite a consistently challenging economic landscape. (Outlook for 2013)

28 Industry Situation & Company Plans The Prada Group achieved much of its financial success this past fiscal year owing largely in part to the strength of its Asian market. However, the company still has room to grow in luxury good markets where it currently occupies a smaller influence, like South America and the Middle East, and plans to focus on these areas, as well as US department stores, in the coming year. A recent press release announced the opening of a Miu Miu store in Abu Dhabi, marking the Group s continued effort to expand into markets where it has yet to meet its full sales potential. %20Miu%20Abu%20Dhabi%20Marina%20Mall_ENG.pdf

29 Executive Summary The Prada Group has seemingly mastered the art of luxury branding and styling. The Group places high value on impeccable presentation and true authenticity, while honing in on marketing and sales strategies that have continually proven successful in generating sales. I am confident that so long as the Group continues in its current direction, maintaining its focus on achieving the utmost creativity and grace in the industry, it will continue to see financial success and investor interest/support.