LONDON — Investors hoping for a speedy return to luxury sales growth in China will have to take a deep breath — and the long view — especially if they’re buying shares in Compagnie Financière Richemont.
This story first appeared in the January 22, 2013 issue of WWD. Subscribe Today.
On Monday, as Salon International de la Haute Horlogerie — the biggest luxury watch fair — unfolded in Geneva, the parent of brands including Cartier and IWC said sales in the third quarter climbed 9.3 percent to 2.86 billion euros, or $3.72 billion, boosted partly by favorable exchange rates.
The figure fell short of analysts’ estimates, and compares with sales growth of 21 percent in the first six months of the 2012-13 fiscal year, and 24 percent in the third quarter of last year.
Sales in the Asia-Pacific region, meanwhile, were flat year-on-year on a constant currency basis. The news pushed Richemont’s stock price down 5.6 percent to 74.30 Swiss francs, or $79.45.
In its third-quarter trading update, Richemont said it was still “unclear” how business patterns in Asia, which has notched double-digit growth over the past year, would evolve in the short term.
At actual exchange rates, sales in Asia rose 6.2 percent to 1.12 billion euros, or $1.46 billion in the three months to Dec. 31.
All euro figures have been converted to dollars at average exchange rates for the periods to which they refer.
“Following several years of exceptional growth in the Asia-Pacific region, in particular China, sales were flat compared to the demanding comparative figures for the same quarter last year,” the statement said, adding that the company takes a “long-term view” in managing its business, and would continue to invest in its brands.
Analysts pegged the Asian slowdown on a variety of issues, including a later start to the Chinese New Year — which begins on Feb. 10, compared with Jan. 23 last year — and softer wholesale sales in the region, especially of watches.
Antoine Belge, head of consumer brands and retail equity research, Europe, at HSBC in Paris, said Richemont’s news was a wake-up call for overeager investors.
“If you look at Richemont’s stock price, it has risen 30 percent over the past three months,” he said. “Today’s fall in the stock price is wake-up call that there is no improvement in China yet. People got excited about the Chinese elections, and they expected improvements overnight. But the new government is not yet in place.”
Thomas Chauvet, a luxury analyst at Citi Global Markets in London, took a similar view in a report published shortly after Richemont released its results on Monday morning.
“While Richemont remains our most preferred long-term investment idea in the luxury sector, we think the market will be disappointed near term,” he wrote, pointing to Richemont’s return to single-digit sales growth, following 11 consecutive quarters of double-digit increases, and the downward trend in Asia.
“The market was expecting an acceleration driven by improved consumer sentiment following the change in Chinese political leadership,” Chauvet added.
Back in November, Richemont had already warned that domestic sales in Asia were slowing down, and the robust double-digit growth rates that the company had consistently seen in the region over the past years were not sustainable.
“Part of that moderation has been self-inflicted,” said Gary Saage, Richemont’s chief financial officer, at the time. “As we grow our retail, we’ve been a bit more cautious on the wholesale side. We don’t want our wholesale partners to be overstocked.”
With regard to watches in particular — which are sold through both wholesale and retail channels — Saage said the wholesale environment in Asia is “not as robust” as it was last year.
On Monday, Richemont reiterated that wholesale sales were “relatively weak,” reflecting a cautious approach by its retail partners in the watch business, and a less favorable retail environment.
The trends in Asia turned quickly: In the first half of this year, sales in the region grew 22 percent. In the third quarter of last year, growth in the region was 36 percent.
Asia wasn’t the only surprise on Monday. There was also an unexpected slowdown at Richemont’s biggest brand, Cartier, which analysts say is most likely due to slowing watch sales.
“[Today’s results] show that jewelry has done exceptionally well, but within Cartier, watches are doing far less well,” said Belge.
In the third quarter, sales at Richemont’s jewelry brands climbed 8 percent at actual exchange rates, and 4 percent at constant currency rates. A year ago, third-quarter sales at the jewelry brands were up 25 percent at both actual and constant rates.
In other Cartier news, the brand has a new managing director for the U.K., Laurent Feniou. Previously a managing director at Rothschild in London, the Belgian national began work at the brand’s Bond Street headquarters last week. He replaces François Le Troquer, who has moved to Paris to work in Cartier’s international retail division.
In other Richemont news, CTF Watch, a subsidiary of Chow Tai Fook Jewellery Group Ltd., has confirmed the formation of a joint venture partnership with the Richemont-owned Baume & Mercier for the distribution of the Swiss brand’s watches in Mainland China.
In a separate report on the joint venture, HSBC’s Belge noted that the deal would have a small impact on both companies.
“Baume & Mercier is the only struggling brand at Richemont, with an access price point positioning similar to Swatch’s Tissot or Longines brands, but clearly not as successful.
“Traditionally, Richemont’s go-to partner for watches in Greater China is Emperor but as B&M is positioned much lower in terms of price points, Chow Tai Fook makes a much more logical partner than Emperor on this, as Emperor is mostly skewed to the high end.”
In the third quarter, Richemont said the Americas showed the most robust sales growth. Sales there grew 18 percent at actual rates. Europe, meanwhile, grew by 11 percent while sales in Japan advanced 3 percent.
In the first nine months, Richemont’s sales climbed 16.7 percent to 7.97 billion euros, or $10.36 billion. Growth in the Asia-Pacific region in the nine months was 16.3 percent at actual exchange rates, and 6 percent at constant exchange rates.