Lindsell Train spots turnaround story in Prada

Quality manager bought stock as analyst note told investors to sell

Photo by David Solce on Unsplash

Lindsell Train has ventured into luxury by buying Prada in the same month Citi issued a sell note against the Italian fashion house.

The Lindsell Train Global Equity fund initiated a position in August at a price around HK$23 (£2.40), according to its latest factsheet. That same month Citi maintained its sell rating on Prada with a target price of HK$20.00.

Fund manager Michael Lindsell said the enterprise value of the circa 2x sales  was “a considerable discount to LVMH and Gucci, admittedly both bigger and currently more successful businesses, that trade on c.4x sales”.

Lindsell acknowledged the company had made some “strategic missteps” and that its share price had fallen from a peak of HK$80 in 2013, two years after its IPO.

Its operating margins have fallen from 27% at that point to 10% today while sales are flat and inventory are depleted, he said. The company has 21% exposure to greater China with 30% to 40% of that coming from Hong Kong.

But Lindsell pinned his hopes for the brand on the “growing aspirational demographic” in the developing world once the company repositions pricing.

He even pointed to the film ‘The Devil Wears Prada’ to justify the fund’s investment stating it is an endorsement of the profile of the brand. “Like with ‘Breakfast at Tiffany’s’ once you’ve made it into a film or book title, you become part of the general parlance even outside the world of fashion.”

His optimism stands in contrast to a Citi note issued on 5 August when the stock was trading at HK$25.90.

Analysts said while quality of sales were improving, it still had concerns about margin pressures in the current year and limited margin recovery in 2020. “On our revised estimates shares trade on a ~38x FY20E P/E fading to ~32x in FY21E, pricing in a steep recovery in earnings, which is not our base case,” the note said.

Nick Train has previously told Portfolio Adviser he would love to add UK leather goods brand Mulberry to the team’s stable of “beloved brands” due to the fact 75% is held by a billionaire Singaporean family.

Eighty per cent of Prada is held by Miuccia Prada and her husband with their son Lorenzo being lined up as the fourth-generation of the family to lead the business.

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