LONDON — Johann Rupert, the executive chairman and main shareholder of Compagnie Financière Richemont, may be one headstrong luxury captain — but he’s also a steadfast one.
Richemont said that it no longer intends to make any asset disposals, and will instead invest in its soft luxury portfolio, which was under review earlier this year and includes brands such as Lancel, Alfred Dunhill and Chloé.
The U-turn left analysts scratching their heads and potential buyers puzzled. Richemont had appointed Nomura to sell Lancel, while numerous industry sources said the company was shopping around Net-a-porter and Chloé, and was open to offers for Dunhill and Shanghai Tang.
“We may rightfully have been criticized for holding onto some of our underperforming investments for too long, but…I consider loyalty a virtue, not a failure,” Rupert told employees and others. “For years, I have had to listen to analysts (and even directors) regarding Van Cleef & Arpels — ‘When will it ever do well?’ ‘Will it ever make money?’ Today those ‘naysayers’ and critical geniuses are nowhere to be found — they all ‘knew’ that VCA would turn into the success that it is today.
“As the controlling shareholder, it is my pleasure to confirm to you that I have no intention of disposing of any maison. We also have no intention of taking any of our maisons public through an IPO.
“For over a quarter of a century, our shareholders have benefited from superior returns on their investments. This was achieved by careful planning and nurturing of the brand equity of our maisons,” he wrote.
On Friday, group chairman Yves-André Istel further spelled out the decision, saying, “No disposals are under consideration at this time or for the foreseeable future. Richemont’s maisons will continue to pursue their differentiated strategies and planned long-term investment programs.” He added that further investment in them will be made, “as in the past, to assure their long-term prosperity.”
During a conference call Friday following the report of the company’s first-half results, Gary Saage, Richemont’s chief financial officer, said future investment in the soft luxury brands would center on “retail stores and points of sale.”
He said Dunhill needed bigger stores and that the brand — an underperformer in the six-month period — still had to “face the American question. And they will do, when the product is correct and the management is ready.” Overall, he said, “We think the new team at Dunhill will get the job done.”
In May, Fabrizio Cardinali was named chief executive officer of Dunhill. Previously, he had held a similar post at Lancel.
Saage declined to put a number on how much Richemont planned to invest in its soft luxury brands, but said it “could be significant.” Overall capital expenditure at Richemont for the current fiscal year and for next year will be 800 million euros, or $1.08 billion, a year, he said.
Saage said that Richemont was 100 percent behind all its brands, even the struggling ones such as Dunhill and Chloé. “The best thing we can do is to get the most competent, fabulous management, give them the resources they need and let them get to work. We believe we can build shareholder value,” he said, adding that Richemont is “not the type of company to decrease investment. We tend to take the long-term view.”
Pressed on the question of whether Richemont would reconsider asset disposals and what, exactly, the words “foreseeable future” meant, Saage did not give a straight answer: “You never say always, and you never say never.”
The industry had been awash with speculation about who might buy some of Richemont’s holdings following comments Rupert made to analysts during a conference call shown on the company’s Web site earlier this year. In answer to a question about possible future acquisitions, Rupert said none were on the cards, before adding, “You know, we talk about Van Cleef and about my baby Panerai, but we don’t talk about a load of rubbish that I also had a hand in buying.…So we haven’t always been that successful. Maybe we’ve got to cull our bad investments quicker. That’s one thing.…Not maybe, we should [cull our bad investments quicker].”
Analysts and the international press, not to mention potential buyers, pounced on Rupert’s words: Last month, Thomas Chauvet of Citigroup in London published a detailed report saying that he expected Richemont to make a “complete exit” from fashion and accessories in a bid to refocus on its hard luxury brands, with the aim of forging a more “homogenous” group that generates higher margins and capital returns.
He said the soft luxury division — Lancel, Chloé, Dunhill, Shanghai Tang, Purdey, Azzedine Alaïa and Peter Millar — could fetch up to 1.86 billion euros, or $2.57 billion, while Net could be valued at 2.28 billion euros, or $3.15 billion.
There were hurdles in disposing of some of the brands, however, sources said. With regard to Lancel, investors who looked at it cited substantial losses, and said it required enormous restructuring and price adjustments. They learned that sales had been declining for the last 18 months, and that problem areas include the product range Daligramme, which faces weak sales and large royalty payments to holders of the Dalí trademarks.
And while Rupert may value loyalty, analysts did not view Richemont’s disposals decision as a positive. “Today’s comments [regarding disposals] are surprising, and likely to be taken negatively,” said Chauvet.
HSBC said in its report that Richemont’s no-disposals announcement “may come as a negative, even though we had warned investors not to expect too much, at least over the short term.”
At midday in London, the stock was down 1.6 percent to 91.50 Swiss francs, or $100.10. The stock clawed back some ground during the day, closing down 0.7 percent at 92.35 Swiss francs, or $101. Still, analysts remain bullish about the long-term prospects of the company, whose shares are still trading at a discount to its luxury peers.
The uptick in the first six months to Sept. 30 reflected currency hedging gains of 127 million euros, or $168 million, that were partly offset by foreign exchange losses of 56 million euros, or $74 million.
All dollar figures have been converted at average exchange for the six-month period.
Revenues in the period climbed 4.3 percent to 5.32 billion euros, or $7.02 billion, with momentum coming chiefly from international demand for jewelry, specialist watchmakers and double-digit gains in the Americas region.
Sales have begun to accelerate in the current quarter: In the month of October, they increased by 6 percent at actual exchange rates, with all regions reporting gains except for Japan, where double-digit growth in local-currency terms continued to be adversely impacted by foreign exchange rates, the company said.
Richemont’s chairman Istel said that sales in the Asia-Pacific region grew during October, primarily due to “positive retail developments and exceptionally high jewelry sales.” He said that in all regions, retail sales were strong, outperforming the wholesale channel where reorder levels remain “cautious.”
In the second half, he said exchange rates are likely to weigh on reported results. Looking ahead, Istel added that “the subdued overall environment, and in particular our continued investments for the long term, call for increased caution.”
By category, jewelry sales were up 2 percent, and Saage said that Van Cleef & Arpels was making “inroads at all price points” while Cartier continued its speed of performance.
Saage added that Piaget jewelry, which represents just 15 percent of the brand’s sales and has benefited from recent investment, is doing well. Sales at the specialist watch division, meanwhile, were up 9 percent.
Montblanc sales fell 3 percent, and the operating result was down 55 percent. Richemont said the declines were due to unfavorable exchange rate effects, and that the results included provisions for the 13 million euros, or $17 million, spent on exiting the female high-jewelry segment and for the repositioning of certain organizational activities.
The Other Brands division grew 6 percent, due to the positive impact of acquisitions such as the high-end sports clothing company Peter Millar, and the Swiss gold refiner Varin-Varinor. Net-a-porter notched double-digit sales gains.
Overall losses in the Other Brands division, however, increased to 35 million euros, or $46 million, and Richemont said this was primarily due to deterioration in the performance at Alfred Dunhill and Chloé.
Saage said both brands had reported “disappointing sales,” adding that “Dunhill is heavily exposed in Asia,” where Richemont’s sales grew by 1 percent in the period. He added that Chloé had a “bit of a timing issue” with one of its new collections.
The Americas was the only geographic area to post double-digit growth: It saw a 12 percent rise in the period, due to strong jewelry sales and the acquisition of Peter Millar in October 2012.
In Europe and the Middle East, sales were up 8 percent, and accounted for 38 percent of overall revenue. Richemont said the region continues to benefit from visitors in major tourist destinations. Japan contracted by 8 percent, due to unfavorable exchange rate conversions.
Sales in the Asia-Pacific region grew by 1 percent, and accounted for 40 percent of the group total, with Hong Kong and Mainland China the two largest markets, the company said.
The region was led by “good growth” in Hong Kong and Macau, offset by lower sales in Mainland China, “largely reflecting prudent consumer sentiment after several years of exceptional expansion.”
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