LONDON – Are storm clouds gathering over luxury?
It’s hard to say, say the leaders of the Compagnie Financière Richemont. There is still volatility in China, growth is slowing in the buoyant US market, and COVID-19 continues to impact consumer behavior.
No more WWD
Despite all that, demand for high-end watches, jewelry and accessories remains robust, said Richemont, which reported strong results for the fiscal first half ended Sept. 30.
At actual exchange rates, Richemont recorded a 24% increase in revenue to €9.68 billion and a 40% increase in profit from continuing operations to €2.11 billion.
On Friday, Richemont shares jumped more than 10% to close at 118.10 Swiss francs.
The parent company of brands such as Cartier, IWC and Chloé recorded a loss of 766 million euros in the six months due to a non-cash impairment of assets related to its proposed sale of Yoox Net-a- bring Group to Farfetch and Alabbar.
The deal, revealed in August, will see Farfetch ultimately take control of YNAP, while Richemont and Farfetch will work together on e-commerce and other digital strategies. As part of the deal, Richemont will also take a minority stake in Farfetch.
While Richemont managers have spoken at length about the volatility and lack of visibility in the market right now, one thing is certain: COVID-19 continues to reshape consumption patterns around the world for the better and for the worse. worse.
In the United States, pent-up demand due to the lockdown is fueling sales, while Chinese spending remains hampered by ongoing COVID-19 restrictions.
With people traveling less, cultivating local clientele remains a priority for Richemont and its peers. Burkhart Grund, the group’s chief financial officer, said “today demand is driven by local customers, in Japan, Europe and the United States”.
Indeed, Richemont said consumption patterns have changed so dramatically post-COVID-19 that no one geography generates revenue or dominates the balance sheet. In the first half, the United States, Europe and China generated a similar level of sales, around 2 billion euros each.
If the demand is there, the visibility on future trends remains unclear.
Regarding China in particular, Grund said that “the demand is still there, but it is disrupted due to the lockdown. Until there is a drastic change from China’s zero-COVID[-19] policy, the situation in the region remains difficult to read.
As Richemont delivered its first-half results on Friday, China unveiled plans to reduce the number of COVID-19 quarantine days to five from seven, an indication that the government is slowly starting to ease restrictions on its “dynamic zero”. » COVID-19 policies.
China isn’t the only hard-to-read market.
Richemont chairman Johann Rupert said he remained “very uncertain about the changing political, economic and social landscapes in Europe and our other key markets. We only know that we will likely face volatile times ahead as central banks seek to contain inflation while governments try to manage severe cost of living pressures.
Despite the lack of visibility in China and elsewhere, Rupert argued that Richemont is “in good health, with a clear strategy, highly desirable and long-lasting creations, strong houses, professional teams and a solid balance sheet”.
Rupert said these assets will see the luxury giant through “uncertain times, allowing us to look to the future with a mix of vigilance and confidence.”
There are many reasons for optimism.
In the first half, operating profit rose 26% to 2.72 billion euros, with profit margins deep in double digits in the watch and jewelry divisions. The company closed the half with net cash of 4.8 billion euros.
Sales at Richemont jewelry houses rose 24% at actual rates, with watches up 22%. Richemont said three of its watch brands, namely IWC, Vacheron Constantin and Jaeger-LeCoultre, are expected to reach 1 billion euros in sales this year.
Sales in the fashion and accessories division (which no longer includes YNAP) jumped 27%.
In his overview, Rupert said Chloé, Montblanc and Peter Millar contributed the most to the 27% sales increase, while Delvaux generated the highest rate of sales growth.
“We are carefully cultivating this promising house for the long term,” said Rupert, referring to Delvaux, which Richemont bought in 2021.
Richemont said it posted double-digit gains, at actual exchange rates, in all lines of business, channels and regions except Asia-Pacific where sales rose 3%, hampered by travel and movement restrictions in China.
Analysts praised Richemont’s performance in the first half.
In its report, the Royal Bank of Canada highlighted “high-quality and broad-based growth across Richemont’s portfolio”, while Bernstein’s Luca Solca said the figures show “demand for luxury goods is remained strong during the summer.
Barclays said the jewelery division performed much better than expected. It increased by 21% at constant exchange rates in the second quarter of the year against consensus projections of 13%. Profit margin before interest and tax for the jewelry division was 37.1% compared to 35.6% for Barclay.
In calls with media and analysts, Richemont executives said customers had “upped” and “upped” their purchases, purchased watches and jewelry with “tangible and lasting value” and placed their names on waiting lists for new styles and collections from a variety of brands.
This comes despite price increases of around 4-8% across all brands this year.
As usual, Richemont executives did not comment on pending transactions, but third-quarter sales trends appear to be in line with those of the prior quarter.
Asked about growth trends in the United States, Jérôme Lambert, managing director of Richemont, said that while the numbers are still strong, “we are seeing less remarkable growth in the region.”
Richemont is coming up against strong comparative numbers in the third quarter and said it expects the U.S. growth rate to begin to “normalize.”
The company added that it sees “some signs” of a recession in the United States, but that luxury is doing very well and that the cost of living crisis is not affecting consumers in the group.
During the presentation, Grund said Richemont’s proposed sale of a majority stake in YNAP to Farfetch and Alabbar is pending antitrust approval, which is expected to take up to a year. The initial phase of the transaction is expected to be completed before the end of calendar year 2023.
As reported, Farfetch and Alabbar agreed to acquire 47.5% and 3.2% of YNAP, respectively, leaving Richemont to own 49.3%. Rupert reiterated that the deal “will achieve my long-standing goal of making YNAP a neutral, industry-wide platform with no majority shareholder.”
In exchange, Richemont will receive Farfetch shares, which are expected to represent 12-13% of Farfetch’s issued share capital. The two partners plan to work together to accelerate the quality and global penetration of Richemont brands online.
Richemont’s brands plan to adopt Farfetch’s technology “to achieve efficiency, flexibility and speed in responding to our customers’ needs, getting our products to the right place, at the right time, seamlessly.” YNAP will adopt Farfetch Platform Solutions to “enhance its outlook,” according to Richemont.
In the first half of the year, Richemont recorded a loss of 2.9 billion euros on discontinued operations following the non-cash impairment of 2.7 billion euros of YNAP’s net assets. Prior to the disposal project, Richemont reclassified YNAP as a “discontinued operation” in its books.
In the first half, YNAP saw its sales increase by 11% at actual exchange rates and by 4% at constant exchange rates. Richemont said growth was led by Net-a-porter and Mr Porter, with “strong performances” in the UK and US
Yoox’s revenue grew by mid-single digits. The Outnet, which launched in the US in May, was impacted by reduced product availability and increased competition. At FengMao, Richemont’s business with Alibaba in China, revenue rose double digits from the same period a year earlier.
On Friday, the company also announced that Patricia Gandji will join the group’s senior executive committee in her capacity as chief human resources officer and CEO of the regions. Gandji will continue to report to the company’s CEO, Lambert.
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