The Prada Group Orly Brooker

Financial Accounting—Summer Semester

http://www.pradagroup.com/documents/announcement/E-

Annual-Report-2012.pdf

Introduction Chief Executive Officer: Patrizio Bertelli

Location of Home Office: Via A. Fogazzaro, 28; 20135 Milan, Italy

Ending date of last fiscal year: January 31st, 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.”—http://www.pradagroup.com/en/group/group-profile

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)

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 31st,

3013, and line up with the company’s internal system

of operations (management).

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 230.3 million final dividend)

Date of Information: May 31st, 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).

Income Statement (from the

consolidated financial statement of the Prada Group)

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.

Balance Sheet (from the consolidated financial

statement of the Prada Group)

Balance Sheet

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 non-current 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 .

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

Statement of Cash Flows

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 2012. 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 2012.

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.

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.”

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….”

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

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

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

Liquidity Ratios 2011 Working Capital: 1,117,503-

716,584=$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)/(266,404+274,175/2)(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)/((374,785+280,

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 + 164

days=203 days. Note that this is

less than a year.

Liquidity Ratios 2012 Working Capital: 1,387,449-

742,062=$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)/(304,525+266,404/2

)(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/((343,802+374,782)/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 + 143 days=180 days. The cycle is shorter than the previous year. Note that this is still less than a year.

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.

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+2,943,568)/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+1,822,743)=0.31x100=31% This indicates that shareholders’ investments contributed significantly to profit, although slightly less than the previous year.

Market Strength Ratios@

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.

*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

(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.

Market Strength Ratios @ 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.

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.

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.

Industry Situation &

Company Plans 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.”

http://www.pradagroup.com/documents/announcement/E-Annual-Report-2012.pdf

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. http://www.pradagroup.com/documents/announcement/E

-Annual-Report-2012.pdf

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.

http://www.pradagroup.com/documents/announcement/E-Annual-Report-2012.pdf (Outlook for 2013)

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.

http://www.accessoriesmagazine.com/67609/pradas-full-year-

profit-jumps-plans-new-focus-on-u-s-south-america-mideast

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.

http://www.pradagroup.com/system/pdfs/100/original/Miu

%20Miu%20Abu%20Dhabi%20Marina%20Mall_ENG.pdf

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.