Richemont Sales Rise 6% Amid ‘Normalization’ of Luxury Market
Updated Nov. 10 3:05 p.m.
LONDON — Luxury leaders may shudder when they hear words like “normalization” or “moderation,” especially in reference to consumers’ appetite for expensive things.
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Johann Rupert, founder and chairman of Richemont, isn’t one of those leaders.
Instead, he’s taking luxury’s slowdown in his stride and hoping to use it as an opportunity to gain market share, build even greater value into the brands, and ensure that Compagnie Financière Richemont continues as a lean and cash-generative operation.
“I’ve been involved with Cartier since 1976 and, trust me, I’ve seen a bunch of ups and downs. And I’m very positive about the medium-term outlook,” Rupert said Friday as Richemont became the latest luxury goods giant to see quarterly sales slow, in China and the U.S. in particular.
“Certainly we’ll use the opportunity to gain market share, and we’re in a position to support our maisons. And even though total demand has moderated, we’re outperforming our competitors. As a group we’re prepared for times like these. We were already stress-tested during COVID-19,” he said.
Rupert added that luxury isn’t alone in witnessing a slowdown in demand.
“In the belated effort to stem inflation, [central banks] moved up interest rates quite dramatically and the full effects are still working through the economy. So it’s no surprise that the market will slow down across all asset classes, because that’s the purpose. You fight inflation by pushing down asset prices, and — I hate to say it — by increasing unemployment,” he added.
During a call following the first-half results announcement, Rupert reminded listeners that he was early to report a slowdown in the U.S. and to warn that Chinese consumers would be more cautious and not “bust their credit cards” after lockdowns lifted earlier this year.
Rupert was also frank about Richemont’s lackluster performance in the half. He said that while the period had started strongly and exceeded expectations, growth eased in the second quarter due to the impact of inflationary pressure, slowing economic growth and geopolitical tensions on customer sentiment.
Richemont’s growth figures, he added, were tarnished by currency headwinds and strong comparatives with the corresponding period last year.
“Consequently, we have seen a broad-based normalization of market growth expectations across the industry. The positive news is that a soft-landing scenario seems to be prevailing in major economies with still higher growth expected from China, which should benefit from stimulus measures,” he said.
Jefferies said in a report following the call that it liked the way that Richemont is thinking about the mid-term. The firm said Richemont, rightfully, won’t rely on price rises as a way to protect profitability.
“Rather, it will be brand resonance that will be entrusted with the task. We also accept that branded jewelry should continue to grow share in a flattish market,” the report said, adding that all of Richemont’s maisons continue to display “strong brand heat.”
The bank said Richemont remains its “top pick in a volatile luxury sector. Our view is that the dislocation between the quality of the underlying brands and of the equity valuation” is greater at Richemont than elsewhere in the sector.
Unlike in the West, those [middle class] clients — and potential clients — are not overstretched.”
Johann Rupert
In the six months to Sept. 30, Richemont’s sales touched 10.2 billion euros, growing 6 percent at actual exchange rates, and 12 percent at constant ones. By comparison, sales in the first quarter were up 14 percent at actual exchange rates and 19 percent at constant ones.
Richemont does not break out its second-quarter figures.
The jewelry category, which includes Cartier, Van Cleef & Arpels and Buccellati, was the biggest driver of growth, climbing 10 percent in the half compared with 24 percent in the first quarter.
The specialist watchmakers saw sales decline 3 percent, compared with 10 percent growth in the first quarter, due chiefly to currency headwinds and Richemont’s ongoing efforts to control inventory and the flow of merchandise to wholesale partners.
By contrast, the company said watch sales in its directly operated stores rose in the high-single digits, mitigating contractions in the other sales channels.
Asia Pacific also drove overall growth in the first six months, with sales in the region climbing 14 percent on the back of Chinese tourism in Hong Kong, Macau and Japan in particular.
Together, sales in mainland China, Hong Kong and Macau rose 23 percent.
Rupert noted, however, that the spending habits of the traveling Chinese are far different from the ones who’ve been opting to stay at home.
The former, he said, have an appreciation for “fine goods with provenance and quality. That is not abating. And that gives us confidence.”
Richemont has been doing its best to deliver that finery with recent events in Beijing, Hong Kong and along the Great Wall.
Last month, Cartier doubled down on China with a landmark event at the Juyongguan Great Wall to celebrate its Le Voyage Recommencé exhibition at Beijing’s Prince Jun’s Mansion.
Cyrille Vigneron, president and chief executive officer of Cartier SA, was doing double duty in the region, speaking at the WWD x SKP fashion and beauty global summit in Chengdu, and hosting the Le Voyage event alongside Cartier China CEO Cécile Naour.
Rupert noted that, by contrast, many middle class Chinese people remain “scarred” by the experience of lockdown. He said these only children and young couples are choosing to stay at home, save their money and spend wisely in a bid to preserve the wealth of their families, and extended families.
“We look at data, we speak to people who are on the ground. Unlike in the West, those [middle class] clients — and potential clients — are not overstretched,” Rupert said.
Other regions didn’t perform as strongly as China.
The Americas contracted by 4 percent due chiefly to lower wholesale sales and a relatively weak U.S. dollar, while Europe saw sales increase 3 percent year-on-year despite challenging comparatives with the previous year.
…we do it so that our clients get to know us better. But we also need to get to know them.”
Johann Rupert
Rupert touched on a wide range of themes in Friday’s call, although he declined to comment on whether the sale of Yoox Net-a-porter Group to Farfetch and Alabbar would close by the end of the current calendar year, as planned.
Last month Europe’s competition watchdog unconditionally cleared the acquisition by Farfetch of a 47.5 percent stake in Yoox Net-a-porter. A 3.2 percent stake will go to Alabbar, YNAP’s longtime partner in the Middle East.
On completion of the deal, Richemont will hold a 49.3 percent stake in YNAP. Over the next five years, Farfetch is expected to acquire the entirety of YNAP, subject to a series of conditions.
In exchange, Richemont will receive Farfetch Class A ordinary shares, expected to represent 12 to 13 percent of Farfetch’s issued share capital.
Rupert said Richemont was already benefitting from Farfetch’s technical solutions and looking forward to working with the company on data analysis and analyzing consumption patterns and consumer desires.
“If we spend 2 billion [euros] a year on communication, we do it so that our clients get to know us better. But we also need to get to know them. Ultimately, in today’s world, if you really want to serve your clients, you need to know what they really want, what their emotions are, and how to service” their current and future needs, Rupert said.
In response to many questions on the call, he said that Richemont’s exposure to the ups and downs at Farfetch was minimal, equivalent to “less than a year’s worth” of communication expenditure, and declined to comment further on Farfetch, as it’s a publicly quoted company.
In the first half, YNAP saw sales decline by 13 percent at actual exchange rates, and by 10 percent at constant ones. Richemont now classifies YNAP as a discontinued operation.
Asked about plans to launch a new fragrance platform, Rupert said it was an opportunity that Richemont had long wanted to pursue. As reported, the company has named Boet Brinkgreve chief executive officer of the new Laboratoire de Haute Parfumerie et Beauté, a platform aimed at scaling the fragrance brands in the Richemont portfolio.
Brinkgreve hails from Dsm-Firmenich, maker of flavors, fragrances and nutritional ingredients, where he held a number of senior executive positions. His latest role was president of Ingredients & Group Procurement, and a member of the executive committee.
Richemont said earlier this year that Brinkgreve will help Richemont’s six maisons already involved in fragrance “to reach critical mass in this highly competitive field, where scale is crucial.” The plan is to leverage resources across the maisons to help develop fragrances, and “promising licenses.”
Rupert said “until now, we’ve never really had the in-house expertise to grow in fragrance and beauty, and we had the rare opportunity to hire a Firmenich expert. Even though various maisons, for instance Montblanc, are doing very, very well in fragrance, we felt the whole area needed a strategic direction.
“We’re fortunate to have gained a proper expert in that field who will help us to coordinate and create strategy. It’s not a tactical [move], but a strategic one,” Rupert said.
In the six months under review, operating profit decreased by 2 percent to 2.7 billion euros, while operating margin shrunk to 26 percent from 28.1 percent.
Richemont said profitability was “significantly impacted by negative foreign exchange developments during the period.”
At constant exchange rates, operating profit grew by 15 percent.
Profit from continuing operations rose 3 percent to 2.2 billion euros.
Richemont noted that the 55 million euros increase in profit for the period reflected a 150 million euros reduction in net finance costs, including foreign exchange losses linked to the group’s investment in Farfetch, part of the wider YNAP sale.
At the end of the six months, the company had 5.8 billion euros in net cash compared with 4.8 billion euros in the corresponding period last year. The increase was generated by “operating activities,” Richemont said.
Richemont shares closed down 5.2 percent at 106.7 Swiss francs on Friday.
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