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Is Prada going out of style?

Kevin T. Levesque | Lonely Planet Images | Getty Images

Shares of Italian fashion house Prada have lost over a third of their value this year amid sagging demand in Asia and Europe, raising questions over whether the luxury brand is going out of style.

The company suffered a 44 percent on-year profit decline to 74.5 million euros in the three months to end-October as sales of high-margin leather goods slumped.

Prada faces intensifying competition from affordable luxury goods makers including Michael Kors and Tory Burch, offering products at cheaper prices with hefty marketing campaigns, say analysts.

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However, the brand is still strong and can succeed if it responds to the evolving luxury landscape by adapting its business strategy, they say.

"The brand is not going out of fashion or becoming redundant," said Vineet Sharma, analyst at Barclays. "But they are suffering from consumers' down trading. "

Strategy shift

The key now for Prada is product differentiation, says Sharma, adding that price cutting strategy would be ill-fit for the company.

"Aggressively cutting prices is the best way to destroy the brand. If they need to discount a bit to unwind some inventory that's fine, but the way out is to innovate, " he said.

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In addition, the company needs to roll out its products faster, expand the price range for its product offering and cut costs, say analysts.

Chief Financial Officer Donatello Galli on a call with analysts Friday noted the board would look at cost-cutting measures including canceling or delaying some of the 50 shop openings slated for next year, according to Reuters.

Manfredi Ricca, managing director of brand consultancy Interbrand's Italy office, believes the company should remain uncompromising and unapologetic about what it stands for in these harder times.

While this might mean sacrificing earnings in the short-term, he believes the company will ultimately come out stronger.

Prada is facing temporary setbacks in some of its key markets, such as Hong Kong and China that are currently affected by social, economic and political difficulties, but "is still a highly relevant, consistent brand with a distinctive edge," Ricca said.

Stock decline

The recent sharp fall in Prada's stock price has caught some investors' attention.

Jackson Wong, associate director at United Simsen Securities Limited says the stock may warrant a small bet at 40 Hong Kong dollars - around 4 dollars lower than current levels.

Despite the company's challenges, Wong expects the company will bounce back if it effectively adjusts its business strategy.

A reason for his optimism is Prada bags are still popular among Chinese.

Prada's sales in China – its largest market – took a hit in the past year due to the economic slowdown and crackdown on corruption, which has altered buying habits, but consumers still like the brand, Wong said.

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"If the Chinese are getting richer due to gains in the stock market, they will buy more expensive luxury items," he added.

However, Shaun Rein, managing director at China Market Research Group, believes Prada's challenges in the mainland run deeper than Beijing's anti-extravagance campaign.

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On one hand it doesn't have the brand loyalty among wealthy mainlanders, who favor brands like Chanel or Hermes. And on the other hand, it's out of reach for the middle class.

"It's not going to be easy for Prada," Rein Said. "They are going to have to look at their product mix, target younger, female customers who are typically more optimistic and spend more, and push their Mui Mui brand rather than Prada."