Richemont looks to the future

On May 18th, the world’s second largest luxury group, Richemont, published results for the year ended March 31st 2018. The day before, the group’s share price reached a record CHF 99. Investors have every reason to raise a glass to Richemont’s performance: over two decades, its shares have gained in excess of 1,200% with market capitalisation currently close to CHF 50 billion. No need to be a maths genius to see that’s quite a killing. Such an excellent track record owes nothing to chance; Richemont’s long-term vision revolves around a conservative strategy which has not only bolstered its position at the top of the luxury tree but also won over investors.

And so while analysts might consider these latest results to be somewhat disappointing, it’s for a worthy cause – one that will stand the company in good stead for the 30 years to come, as per the wishes of Johann Rupert who holds a majority of Richemont’s shares (10% of capital) and majority voting rights. The latest figures show a very slight increase in sales of 3% to just under €11 billion with operating profit (EBIT) of €1.8 billion (+5%) and profit for the year of €1.2 billion (+1%). By way of comparison, Swatch Group posted bigger increases for 2017. A closer look at Richemont’s results reveals Asia-Pacific as the driving force. The region accounts for 40% of the group’s sales and registered 12% growth while other regions struggled, adversely impacted by currency rates. In segment terms, jewellery outshone the group’s other activities as sales grew by 9% with an operating margin just shy of 30%. It’s a less rosy picture for the group’s “specialist watchmakers”, where sales declined 6% and operating margin is under 10%.

Preparing for the future

One factor to have weighed on Richemont’s accounts, and particularly in the watch segment, is the continued inventory buybacks, aimed at keeping watches out of the “grey market” of unauthorised resellers. The group was one of the first to react to the economic downturn two years ago with a first round of buybacks costing €278 million for the year to end March 2017. Evidently this wasn’t sufficient, as it was followed by a second round last year that cost the group €203 million. Unsurprisingly, then, the biggest boost in sales came from the retail channel, i.e. 1,835 directly operated stores (including 712 franchises), where sales increased 8%. In contrast, the group’s wholesale business of third-party retailers stayed in the red with a 5% decline in sales. This is reflected in the €436 million of net investment in tangible fixed assets which predominantly concerned Richemont’s own stores and production capacity.

Investment continues, as do measures to clean up the group’s retail network. Cashflow from operations remains strong at €2.7 billion (+43%), largely thanks to tight cost control, and the group reports a healthy balance sheet with a net cash position of €5.2 billion and long-term financial liabilities amounting to barely 17% of total liabilities. The group is aligning itself with changes in the markets, for example through a 7.5% stake in travel retailer Dufry, the launch of a new brand, Baume, that is tailored to millennials, and a €2.7 billion bid to acquire full control of Yoox Net-à-Porter (YNAP), the largest online luxury retailer with sales of €2.1 billion (+12%) in 2017. It’s worth noting that as a result of the bid – funded through Richemont’s first ever bond transaction – the group will book a one-time, non-cash, accounting gain of €1.4 billion on its existing interest in YNAP. Next stop: €15 billion in sales!