It is fashion, darling. That is supposed to explain why luxury goods company shares command such high multiples. Italy’s Prada knows this only too well. It trades with an enterprise value that is 15 times its forward earnings before interest, tax, depreciation and amortisation. That compares with 14 times for Salvatore Ferragamo and 12 times for Tod’s – all three are in the business of tote handbags and shiny leather loafers. But then Prada’s exposure to China and its appetite for all things luxury was supposed to help the Italian brand justify its higher price tag. After all, more than a third of the company’s sales come from Asia outside of Japan.

But China’s love affair with luxury is waning. Beijing’s new government is all about austerity and stamping out corruption, which is sure to hurt luxury gift giving. Indeed, it may be already starting to show. In Prada’s 2012 results, reported on Friday, same-store sales picked up 14 per cent in Greater China last year, down from 40 per cent growth in 2011 – the year when hot money was still flying around thanks to a hefty post-financial crisis stimulus. Overall sales in Asia outside of Japan jumped by one-third, but foreign exchange gains flattered that number by 10 percentage points.

This relative softness has taken the glamour out of Prada’s overall performance. True the company’s headline numbers were better than peers – total sales were up 29 per cent in 2012 compared with say 17 per cent at Ferragamo. But profit growth is down sharply. Earnings per share rose by 41 per cent in 2012 down from 70 per cent in 2011.

Investors who bought into Prada’s story when it listed in Hong Kong back in June 2011 will still be glad they did. The share price has doubled over that period when the Hang Seng was flat and LVMH, for example, gained just 13 per cent. It is fair that Prada’s high growth rates mean that it should command a higher multiple than peers, and the market for leather goods, where the group makes most of its money, is growing faster than jewellery and watches. Still, for investors to keep drooling over a 25 times forward price/earnings ratio they have to be convinced that the shine will not come off those growth rates.

Email the Lex team in confidence at lex@ft.com

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