Prada S p A : Announcement of the Consolidated Results for the Six-Month Period Ended June 30, 2019

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PRADA spa (Stock Code: 1913)

ANNOUNCEMENT

OF THE CONSOLIDATED RESULTS

FOR THE SIX-MONTH PERIOD

ENDED JUNE 30, 2019

• - Net revenues were Euro 1,570 million, up by 2% at current exchange rates.

• - Retail net sales, significantly impacted by the decision to reduce markdown sales, were Euro 1,232 million, in line with the same six month period of 2018.

• - EBITDA, impacted by the new IFRS 16, was Euro 491 million, 31.2% on net revenues, while the EBIT was Euro 150 million, 9.6% on net revenues.

• - The Group's net income for the period, positively impacted by the Patent Box tax benefit, was Euro 155 million, 9.9% on net revenues.

• - The Net Operating Cash Flows, after the repayment of lease liabilities, were Euro 137 million.

• - The net financial position, after dividend payments totaling Euro 146 million and real estate investments of Euro 60 million, is indebtedness at Euro 507 million.

Presentation of the Prada Group

PRADA spa (the "Company"), together with its subsidiaries (collectively the "Group"), is listed on the Hong Kong Stock Exchange (HKSE code: 1913). It is one of the leading companies in the luxury goods industry, where it operates with the Prada, Miu Miu, Church's and Car Shoe brands in the design, production and distribution of luxury handbags, leather goods, footwear, clothing and accessories. The Group also operates in the eyewear and fragrance industries under specific licensing agreements. In addition, with its acquisition of Pasticceria Marchesi 1824, the Group made, in the recent years, its entry into the food industry, where it is consistently positioned at the highest levels of quality.

As of June 30, 2019, the Group's products are sold in 70 countries worldwide through a network of 637 directly operated stores ("DOS") and a select network of luxury department stores, independent retailers and franchise stores.

The Company is a joint-stock company with limited liability, registered and domiciled in Italy. Its registered office is at via Fogazzaro 28, Milan.

Basis of Presentation

The financial information for the six months ended June 30, 2019 presented herein refers to the group of companies controlled by the Company, holding company of the Group, and is based on the unaudited Interim condensed consolidated financial statements of the six-month period ended June 30, 2019.

The International Financial Reporting Standards (IFRSs) adopted to prepare this report differ from those applied to prepare the consolidated financial statements for the year ended December 31, 2018 due to the transition to a new standard, IFRS 16 - Leases.

For the sake of comparability, on a voluntary basis the management has prepared a restated version of the Statement of Profit or Loss for the six months ended June 30, 2018 ("2018 Pro-forma") in which the retrospective effects of IFRS 16 were estimated. The adjustment resulted in a Euro 6.2 million decrease in the profit for the first six months of 2018, attributable essentially to interest expense.

New IFRS and Amendments to existing standards	Effective Date for Prada Group	EU endorsement date
IFRS 16 Leases	January 1, 2019	Endorsed in October 2017
IFRS 9: "prepayment features with negative compensation"	January 1, 2019	Endorsed in March 2018
IFRIC interpretation 23: "Uncertainty over income Tax Treatments"	January 1, 2019	Endorsed in October 2018
Amendments to IAS 28 Long-Term interests in Associates and Joint Ventures	January 1, 2019	Endorsed in February 2019
Annual Improvements to IFRS Standards 2015-2017 Cycle	January 1, 2019	Endorsed in March 2019
Amendments to IAS 19: Plan Amendment, Curtailment or Settlement	January 1, 2019	Endorsed in March 2019

IFRS 16 Lease

On January 1, 2019 "IFRS 16 Leases" replaced "IAS 17 Leases" and the related interpretations.

The new standard applies to all existing leases that provide for the payment of fixed rents, including indexed ones, or a guaranteed minimum ("rent in scope"). Purely variable rent, typically linked to sales without a guaranteed minimum, is excluded from the scope of application of the standard ("out of scope rent").

The standard is effective for annual periods beginning on or after January 1, 2019 and the Company opted to apply it retrospectively according to the "modified retrospective approach". The main impacts on financial statements at the transition date (January 1, 2019) can be summarized as follows:

• - recognition of lease liabilities, i.e. the present value of the residual future payments, of Euro 2,448.9 million;

• - recognition of the Right of Use assets in the non-current assets for Euro 2,414.4 million. This amount is mainly made up of the value of the lease liability:

  • - increased by key money of Euro 94.5 million (reclassified from intangible assets to this new asset category);

  • - reduced by the deferred rent expenses of Euro 162.9 million already accrued as at January 1, 2019 pursuant to the previous "IAS 17 Leases" standard (reversing this item from non-current liabilities);

  • - increased by the reinstatement costs, included in the leasehold improvements, and prepayment of Euro 36.5 million;

  • - reduced by onerous lease of Euro 2.6 million;

• - introduction of two new cost components: the depreciation of the Right of Use assets (Euro 229.4 million for the first six months of 2019) and the interest expense related to the updating of the present value of the lease liability (Euro 24.8 million at June 30, 2019).

The variable rent ("rent out of scope") remained accounted for as operating expenses as in the past, consistently with the comparative period of 2018.

In adopting IFRS 16, the Prada Group used the exemption allowed by IFRS 16:5(a) regarding short-term leases and low-value assets, although the effects of these exemptions were immaterial. For such leases, the introduction of IFRS 16 did not entail recognition of the lease liability and the related Right of Use assets, as the lease payments are still recognized in the Statement of Profit or Loss on a straight-line basis over the terms of the respective leases, as it was under the "IAS 17 Leases".

Transition to IFRS 16 introduced areas where professional judgment may be required, involving the establishment of some accounting policies and the use of estimates. The main ones are summarized below:

• - the identification of a lease term is very important because the form, legislation and common business practice regarding leases for real estate vary considerably from one jurisdiction to another. Based on its past experience, the Group has set an accounting policy for inclusion of the lease renewal period beyond the non-cancellable period, limited to cases in which the lease assigns an enforceable right that the Group is reasonably certain to exercise;

• - since most leases stipulated by the Group do not have an interest rate implicit in the lease, the discount rate applicable to future lease payments was determined as the risk-free rate of each country in which the leases were stipulated, with payment dates based on the terms of the specific lease, increased by the parent company's credit spread.

The adoption of the new IFRS Standard did not have any material effect on the opening equity balance of the year 2019.

The adoption of the new standard entailed the increase of the EBITDA following the reclassification of fixed rental costs (so called "rent in scope") within the charges for depreciation (Euro 229.4 million in the first half of 2019).

EBIT raised too, albeit to a limited extent, but not insignificant, following the reclassification of a component of fixed rent cost within the interest expense (Euro 24.7 million in the first half of 2019).

Following these changes in non-IFRS Measures, the 2018 Profit or Loss was presented in a Pro-forma basis to facilitate comparability with the current period.

New Non-IFRS Measures

The Group uses certain financial measures ("non-IFRS measures") to measure its business performance and to help readers understand and analyze its statement of financial position. Although they are used by the Group's management, the measures are not universally or legally defined and are not regulated by the IFRS adopted to prepare the Consolidated financial statements. Other companies operating in the luxury goods business might use the same measures, but with different calculation criteria, so non-IFRS measures should always be read in conjunction with the related notes, and may not be directly comparable with those used by other companies.

The Prada Group, with the introduction of the new standard "IFRS 16 Lease", used the following non-IFRS measures in this Interim Financial Report:

2018 Pro-forma: 2018 Consolidated Statement of Profit or Loss for the six months ended June 30, 2018 ("2018 IFRS Consolidated Statement of Profit or Loss") adjusted following the application of IFRS 16. The adjustments were determined by applying the same criteria and assumptions adopted in the first time application of the new standard at January 1, 2019, as reported above. These adjustments made to 2018 IFRS Consolidated Statement of Profit of Loss represent the management's best estimate to facilitate comparison with the 2019 Consolidated Statement of Profit of Loss.

EBITDA: Earnings before Interest and taxation, i.e. "Consolidated net income for the period", adjusted to exclude "total financial income/(expenses)", "taxation" and "Total depreciation, amortization and impairment (included the Depreciation of the Rights of Use assets)".

Net financial position surplus/(deficit): Short-term and long-term financial payables due to third parties and related parties, net of cash and cash equivalents and short-term and long-term financial receivables due from third parties and related parties.

Net financial position surplus/(deficit), including lease liabilities: Net Financial Position including lease obligations.

(amounts in thousands of Euro)

June 30 2019 (unaudited)

December 31 2018 (audited)

June 30 2018 (unaudited)

Net financial position surplus/(deficit)

(506,634)

(313,506)

(240,201)

Short-term Lease Liability Long-term Lease Liability

(354,140) (2,064,920)

Total Lease Liability

(2,419,060)

Net financial position surplus/(deficit), including Lease Liability

(2,925,694)