Had Joachim du Bellay been an investor rather than a sixteenth-century poet, his “Happy the man who, like Ulysses, finds sweet journey’s end…” might have read “Happy the man who, like Croesus, bought shares at a low price.” The “occult science” of trading is grounded in this simple equation: buy low and sell high. It’s an ideal situation which, like any ideal, can’t always be put into practice. There are, nonetheless, certain extraordinary circumstances where this strategy takes on its full meaning – the kind of circumstances the entire planet is currently experiencing and which, initially at least, saw share prices collapse as the global economy bore the brunt of the coronavirus pandemic.
While there will always be the “I-told-you-sos”, quick to criticise the excesses of the past, no-one takes pleasure from a situation in which thousands risk losing their job, businesses are hanging by a thread and, sooner or later, future generations will foot the bill for the trillions in payouts to keep the economy afloat. It will be a long and rocky road to recovery, but why not take some comfort from the signs that there is light at the end of this tunnel. This is where financial analysts come in. Not always appreciated by those who work in the “real economy”, they are the ones who can offer some hope after a disastrous first quarter.
Ready to weather the storm
Luxury groups faced a difficult first quarter, with sales falling by some 15% at Kering and at LVMH. Richemont saw its sales take an 18% tumble. Hermès came off better at -6.5%. After what will likely be an equally dismal second quarter, when a large part of the world population followed instructions to “stay home”, clouds should begin to lift over the course of the second half. In the meantime, what conclusions can we draw from the publication of Richemont’s financial results for the year ended March 31, 2020 – the only detailed numbers available to date, and which include the first effects of Covid-19. Taken over twelve months, we can see how the initial impact of the pandemic has been relatively well absorbed.
While fourth quarter sales declined by 18%, group sales for the year nonetheless rose 2% to €14.24 billion. There were no dramatic losses among the Specialist Watchmakers, with overall sales contracting by 4% to €2.4 billion. The group’s Jewellery Maisons continue to drive growth, progressing 2% to €7.2 billion. The sting lies with operating profit for the year which dropped 22% to €1.5 billion, the effects of the coronavirus being largely responsible for this decline. The group continued to invest, in particular in online distribution. As for the 67% decline in net profit to €931 million, this is mainly the result of net foreign exchange losses and the non-recurrence of a post-tax non-cash gain, amounting to a cumulative difference of €1.6 billion. In conclusion, Richemont is in a strong financial position to take on a difficult 2020/21 fiscal year.
Cash in reserve
This position is further reinforced by a healthy balance sheet; the group is sitting on €4.4 billion in cash plus €4.3 billion in financial assets, while borrowings remain under the €4 billion mark. On May 18 Richemont announced it had placed a bond transaction worth €2 billion with three tranches maturing at different dates, which investors snapped up. Chief Financial Officer Burkhart Grund commented that “Whilst Richemont has a robust balance sheet and more than adequate cash resources, we view it prudent to secure additional liquidity to weather potentially tougher times ahead. This bond transaction will support the long-term development of our Maisons and businesses.”
Richemont isn’t the only luxury giant to enjoy such a solid financial footing. LVMH, for which 2019 was a record year, is in a comparable situation with a net financial debt to equity ratio of 16%. Hermès is in a similarly enviable position, with a €4.4 billion cash position and virtually no long-term debt. These figures shed a different light on the likely evolution of the different groups’ share price, after significant declines: Richemont’s share price lost 32% over the six months to May 20 (shareholders didn’t appreciate that the group halved its annual dividend), with equally sharp decreases for Swatch Group (-38%) and Kering (-21%). Taking less of a tumble were LVMH (-10%) and Hermès (-5%). As analysts are quick to note, at these levels Richemont shares are undervalued by around 40% compared to intrinsic value. Knowing that figures are one thing, reflecting a past situation, and confidence in the future another, possibly the time has come for investors to ask that question.