After the Buying Binge, Luxury Groups Forced to Deal With Debt

With the era of empire building over, it’s time for the empire builders to pay down the mounds of debt they ran up during their rampant expansions.

At the same time, it’s a delicate balancing act between cost cutting and damaging the image of a brand. Some in the market warn that drastic advertising cuts and a dated, disorganized store network could ultimately do more harm than good.

“Opening stores always weighs on the balance sheet in the short term, before they break even, but in the longer term, having directly controlled stores means internalizing higher margin sales and having better control of the image than wholesale sales,” noted one analyst.

Another company familiar with high debt is Prada. It has been looking to chip away at the pile it accumulated as it transformed itself from a Milan fashion house to a multibrand player by buying labels like Jil Sander and Helmut Lang, as well as shoemaker Church’s & Co.

Selling its 25.5 percent stake in Fendi to LVMH helped Prada lower its net debt to $807.2 million at the end of last year from $1.15 billion at the end of 2001. That compares with a 2002 sales volume of $1.81 billion.

Plans for a real estate spinoff should help lower the load to just above $576.6 million by the end of 2003, a spokesman said. In another cash-generating move, Prada last month sold 45 percent of Church’s to private equity fund Equinox Management Co. SA for an undisclosed sum.

Citing weak market conditions, Prada last summer postponed its planned initial public offering for the third time. Prada chief Patrizio Bertelli has said the group will consider the stock market again, but it could come as late as 2005 when $807.2 million worth of its convertible bonds expire. Prada has to repay the bonds in cash if it doesn’t carry through with an IPO by then.

“The steep acceleration of the [drop in demand] was particularly harmful for our company,” Bertelli told Il Sole 24 Ore in an interview last February. At the middle of last year Prada “found itself in a tough spot with no IPO and a lot of debt acquired through buying brands and expansion in production and distribution.”

But while Prada’s debt situation is cause for some concern, observers agree that the company generates enough cash and has enough leverage with the banks to keep itself afloat.
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