Annual Report 2018 PRADA spa (Hong Kong Stock code: 1913) ANNUAL REPORT 2018 TABLE OF CONTENTS The PRADA Group 3 Financial Review 55 Directors and Senior Management 77 Directors’ Report 93 Corporate Governance 115 Consolidated Financial Statements 137 PRADA spa Separate Financial Statements 143 Notes to the Consolidated Financial Statements 149 Independent Auditors’ Reports 231 The first Prada store Galleria Vittorio Emanuele II, Milan THE PRADA GROUP PRADA Group Annual Report 2018 - The PRADA Group 3 Miuccia Prada and Patrizio Bertelli PRESENTATION Pioneer of a vision that transcends fashion, the Prada Group inquisitively observes contemporary society and its interactions with very diverse and apparently distant cultural spheres. A fluid perspective that becomes the Group’s manifesto, suggesting a unique approach to doing business by placing at the core of ethical and action principles essential values such as freedom of creative expression, reinterpretation of what already exists, preservation of know-how and enhancement of people’s work. The Prada Group is a contemporary interpreter of changing scenarios. In a three- dimensional temporal dialogue that combines the identity heritage of the past with demands and dynamics of the present and future perspectives, creativity molds ideas that transcend the boundaries of the ordinary and create an innovative vision of tomorrow. “Thorough observation and curiosity for the world around us have always been at the heart of the creativity and modernity of the Prada Group. In society, and thus in fashion, which is somehow a reflection of it, the only constant is change. The transformation and innovation of references, at the core of any evolution, has led us to interact with different cultural disciplines, at times apparently far from our own, allowing us to capture and anticipate the spirit of the times. Today this is no longer enough: we must be the agents of change, with the flexibility required to translate the demands of the market and society into tangible actions that inform our way to do business.” Miuccia Prada and Patrizio Bertelli PRADA Group Annual Report 2018 - The PRADA Group 5 Mario Prada PRADA GROUP HISTORY The Prada brand dates back to the beginning of the last century: in 1913, Mario Prada opened an exclusive store in the Galleria Vittorio Emanuele II, Milan, selling handbags, travel trunks, beauty cases, tasteful accessories, jewelry and other luxury items. Thanks to the innovative design of its goods, created using fine materials and sophisticated techniques, Prada rapidly became a favorite of the aristocracy and the most stylish members of the haute-bourgeoisie in Europe. In 1919 Prada became an official supplier to the Italian royal family; since then Prada has been able to display the House of Savoy coat of arms and knotted rope design in its trademark logo. Over the years, the Prada name gained ever greater renown and prestige. The turning point for the Group came at the end of the 1970s when Miuccia Prada, Mario Prada’s granddaughter, partnered with Tuscan entrepreneur Patrizio Bertelli to combine creativity with business acumen and lay the foundations for the ensuing international expansion. Patrizio Bertelli broke new ground in the luxury goods sector by introducing a business model based on direct, internal control over all processes and applying strict quality criteria to the entire production cycle. Miuccia Prada’s creative talent attracted international attention due to her innovative approach, inspired by an unconventional outlook on society, enabling her to anticipate and often influence new fashion and design trends. In 1977 Patrizio Bertelli founded IPI spa, where he concentrated the production resources he had built up over ten years in the leather goods industry. In the same year, IPI spa obtained a license from Miuccia Prada for the exclusive production and distribution of Prada brand leather goods. In the following years the two family businesses gradually merged into a single Group. In 1983 the Prada family opened a second store in prestigious Via della Spiga in Milan, one of Europe’s key shopping destinations. The store showcased the new brand image by pairing traditional elements with modern, innovative architecture, thereby revolutionizing and setting a new standard for luxury retail. PRADA Group Annual Report 2018 - The PRADA Group 7 In response to the growing appreciation of Prada products, the leather goods range was expanded to include the first women’s footwear collection in 1979. The first clothing collection was launched in Milan in 1988. At the same time the internationalization process began, with the first store openings in New York and Madrid, followed by London, Paris and Tokyo. In 1993 Prada made its debut in menswear with its first men’s clothing and footwear collection. That same year, Miuccia Prada’s creative inspiration led to the establishment of a new brand, Miu Miu, conceived for sophisticated, stylish women who love to stay ahead of fashion trends. Miu Miu now creates women’s ready-to-wear apparel, handbags, accessories, footwear, eyewear and fragrances, and accounts for a significant share of the Group’s sales. In 1993 Miuccia Prada and Patrizio Bertelli created “Milano Prada Arte”, which subsequently became “Fondazione Prada”, to pursue their interests and passions in the world of art and culture. In 1997 Patrizio Bertelli organized the Prada Challenge sailing team to compete for the 2000 America’s Cup and in the same year Prada launched its leisurewear range featuring the “Linea Rossa” (red line). In 1999, the Prada Group acquired the classic brand Church’s, founded in 1873 in Northampton, England. The brand, specialized in high-end handcrafted footwear, is a universally recognized symbol of British tradition and sophisticated elegance. In 2001, the Prada “Epicenter” store, designed by Rem Koolhaas, was opened on Broadway in New York City. This was the first store of the Epicenters project, whose purpose was to redefine the shopping concept and try out inventive ways to interact with customers. A second Epicenter store was opened in Aoyama, Tokyo, followed by a third one on Rodeo Drive, Beverly Hills, in 2004. During the same year, Prada acquired control of Car Shoe, a classic Italian brand renowned for its exclusive driving moccasins. 8 PRADA Group Annual Report 2018 - The PRADA Group Prada Epicenter concept store Broadway, New York by architect Rem Koolhaas and Studio OMA Prada Epicenter concept store Los Angeles, Beverly Hills by architect Rem Koolhaas and Studio OMA Prada Epicenter concept store Aoyama, Tokyo by architects Herzog & de Meuron In 2003, Prada entered into a licensing agreement, renewed in 2012, with Italian eyewear manufacturer Luxottica, a global leader in the eyewear industry. The Luxottica Group currently produces and distributes eyewear under the Prada and Miu Miu brands. Also in 2003 the Group partnered with Spanish cosmetics manufacturer Puig Beauty & Fashion Group, launching the first fragrance, Amber, at the end of 2004. In 2006, Miu Miu moved its fashion show venue to Paris to better represent its brand identity. The Prada phone by LG, the world’s first touch screen cellphone, made its debut in March 2007. The LG/Prada partnership achieved further success with new releases in 2008 and 2011. On June 24, 2011, Prada was successfully listed on the Main Board of the Hong Kong Stock Exchange. In March 2014, PRADA Spa entered the food industry by acquiring control of Angelo Marchesi srl, owner of the historical Milanese patisserie founded in 1824. In 2015 the Prada Group and Coty Inc. introduced the first Miu Miu fragrance. In September of that year the Marchesi brand was developed on the market with the opening of a patisserie in via Montenapoleone, Milan. 2016 featured extensive industrial investments, leading to the inauguration of a new leather goods factory and the renovation of five factories in Tuscany and Umbria. In addition, the first construction phase of the new logistics hub for finished products was completed in Tuscany. In 2017, a restyling plan for Prada and Miu Miu stores was coupled with and a broad program of pop-up events was launched to further support retail activities. Also in 2017, the Prada Group was admitted to the Cooperative Compliance Tax Regime introduced with Italian Law Decree 128 of 2015. PRADA Group Annual Report 2018 - The PRADA Group 11 In 2018 the Group added to its customary Milan and Paris fashion shows two important events to present pre-collections: Miu Miu Croisière at the Hotel Regina in Paris and the Prada Resort at the Piano Factory, where the Group’s offices are located in Manhattan; the latter was also broadcast live on Times Square’s big screens. Also in 2018, Prada officially began its adventure as Title and Presenting Sponsor of the 36th edition of America’s Cup and Main Sponsor of the Luna Rossa team, Challenger of Record for the prestigious competition. Lastly, Miuccia Prada received the Outstanding Achievement Award from the British Fashion Council for her outstanding contribution to creativity and to the global fashion industry. 12 PRADA Group Annual Report 2018 - The PRADA Group Miu Miu Croisière fashion show - Hotel Regina, Paris Prada Resort fashion show - Times Square, Manhattan, NY THE GROUP'S BRANDS The Prada Group is synonymous with innovation, transformation and independence. Under such principles it offers its brands a shared vision in which they may express their essence. The complexity of visions has broadened the horizons of luxury, without fear of facing contradictions, modifications and passions. The Prada Group owns and manages some of the most prestigious luxury brands in the world and works constantly to enhance their value by increasing their visibility, recognition and appeal. The Group’s brands are its most important asset. PRADA The Prada label has become one of the most coveted and widely-recognized brands in the fashion and luxury goods industry.