First things first: the financial community was all smiles when Richemont announced sales for the first five months (April-August) of its financial year, at its annual general meeting in Geneva on September 7th. With sales growing 29% (+35% at constant exchange rates), interim results for the six months to September 30th are expected to show a significant increase in sales and operating profits when they are released on November 11th. However, the strong Swiss franc and last year’s accounting gain of €101 million from the acquisition of Net-A-Porter should align attributable profit for the half-year with the previous year’s figures.
Typically, Johann Rupert, Executive Chairman and Group Chief Executive Officer, refrained from wide-eyed optimism when commenting these interim results: “The rest of the financial year is difficult to predict. The problems of fiscal deficits generally and Euro zone difficulties in particular are likely to act as a drag on business prospects for companies in the period ahead, especially if the growth markets are affected. To hope for a continuation of the current good trading levels in such circumstances may be over-optimistic. In addition, we must keep in mind the demanding comparative figures against which sales in the coming six months will be measured.”
No repeat performance of 2008-2009
Even before results were released, in mid-August Morgan Stanley upgraded its recommendation for Richemont shares by two notches to overweight from underweight. The day after five-month figures were released, share target price rose to CHF 58 from CHF 47 (+7%). “We see an excellent entry point for the stock,” commented Louise Singlehurst and Natasha Moolman, analysts at Morgan Stanley. “We have modelled Richemont’s exposure to the fast-growing emerging regions and in our view the market is incorrectly estimating the growth potential of the Group and its portfolio of first-class brands. We believe these regions, led by Greater China, now account for 60% of the Group’s revenue compared with 40% in 2008. At current prices, the market values Cartier, a leading brand, at only twelve times anticipated 2012 earnings. In our view, this is unwarranted considering its dominant position in jewellery, its exposure to emerging markets, and its operating margin in excess of 30%.”
Singlehurst and Moolman did pinpoint uncertainties linked to deteriorating sales in European markets and the slowdown in the United States, which increase the risk of seeing demand for luxury goods fall. However, they do not anticipate a repeat performance of 2008-2009, especially in the very high-end segment. Both analysts point to Richemont’s assets, which range from a higher proportion of customers in emerging regions and healthy inventory to continued potential for price increases, particularly at the very high end of the market (estimated at ±70% of the group’s operating profit) and strong retail sales. Not forgetting the Group’s net liquid assets, currently €2.6 billion, which Singlehurst and Moolman expect will increase to €3.6 billion by 2015: proof of stability in an uncertain environment. Morgan Stanley concludes: “Despite the anticipated contraction in developed markets, meaning a drop in the Group’s sales in these regions which we estimate at 7% as of the second half of its 2012 financial year and for 2013, we believe Richemont is in a position to report 11% growth for the current financial year overall and an impressive 6% increase for the next.”