LONDON — Johann Rupert is banking a lot on China — and that makes him a little uneasy.
The chairman and chief executive officer of Compagnie Financière Richemont SA said Wednesday that Chinese consumers are a major driving force behind the group’s growth, and will be for the foreseeable future. Provided they keep on buying, that is.
“I feel like I’m having a black-tie dinner on top of a volcano,” Rupert said in presenting Richemont’s year-end results. “That volcano is China. There is a volcano in there — whether it happens this year, 10 years from now, or in 20 years time. We are exposed to China.
“Personally, I don’t think anything will go wrong,” he added. “That’s my view. I may be optimistic. If I’m wrong on China, we’re going to have issues. It is too ghastly to contemplate for all of us.”
For now, all seems right with China — which is good for Richmeont as well as its major competitors, LVMH Moët Hennessy Louis Vuitton and PPR. Richemont, parent of brands including Cartier, Dunhill, IWC and Chloé, said the Asia-Pacific region now accounts for 42 percent of group sales, and demonstrated the most aggressive growth of all regions, with a 43 percent increase in sales in the fiscal year ended March 31.
“Chinese consumption has increased significantly, and has been one of the main drivers for growth in the year,” said Richard Lepeu, Richemont’s deputy ceo, on a conference call Wednesday. “We are seeing the Chinese buying in Hong Kong, Macau and Europe — Paris and Switzerland in particular,” he said, adding that the brand would also roll out stores in Mainland China this year.
But the Chinese aren’t the only ones snapping up Cartier diamond stud earrings and Jaeger-LeCoultre watches. Richemont said domestic tourism in the U.S. and local clients in Europe — especially Germany, France and Switzerland — were also fueling sales.
In the 12-month period, the Americas posted a 26 percent spike in sales, followed by Europe with a 20 percent increase, and Japan, where sales rose 13 percent. Richemont said the jewelry and watch divisions delivered record sales and profits in the year, despite the strength of the Swiss franc and the rising cost of precious materials and input costs.
Overall profits soared 42.7 percent to 1.54 billion euros, or $2.1 billion, on the back of sales that rose 28.6 percent to 8.87 billion euros, or $12.1 billion. All figures have been converted from the euro at average exchange rates for the 12-month period.
Looking ahead, Rupert said sales in April — the first month of the new fiscal year — rose 29 percent year-on-year, although the company remained “mindful” of the unstable economic environment, particularly in the euro zone.
“I am loathe to make predictions for the next year,” he said. “I have no idea what currencies are going to do, or whether the Chinese will continue to buy ad infinitum. We are living with volatility, and we are living with an excess of debt. It is not a pretty picture in Europe…and there will be more civil strife.”
Nonetheless, the Richemont chief said, “Our maisons remain entrepreneurial and innovative businesses at heart. More than ever, we are convinced of their resilience and long-term prospects.”
The sentiment extended even to Rupert’s health. Asked about a succession plan at the group his family controls, Rupert, 61, said, “I had three stents put into my heart last month in New York. I feel fine, but I will get out of here [the company] sometime.”
Richemont currently has 3.2 billion euros, or $4.35 billion, in net cash on its balance sheet, an increase of 595 million euros, or $809.2 million, over the previous year. As for what he might do with the cash hoard, Rupert said: “Our job is to create goodwill and not pay other people for goodwill. I’d rather invest in things that we know well, and use the money to support what we know. And, as we’ve learned, you need firing power to secure premium sites for stores.
“We are not planning any acquisitions, we’re comfortable with the cash we have, and we’ll be redeploying it internally by supporting our maisons. We can do better than to buy other companies.”
Instead, Richemont is investing in itself. The company added 72 new stores in fiscal 2011-12, and the company plans to add the same number this year. Lepeu said the stores would be across all the brands, and would target such regions as Asia-Pacific, Brazil, the Middle East, Las Vegas, New York and Paris.
In addition, the group revealed a buyback program of up to 10 million “A” shares over the next two years, representing 1.7 percent of the capital and 1 percent of the voting rights. The A shares acquired will not be canceled, and no second trading line will be introduced as a consequence of the buyback program, Richemont said. The A shares to be acquired will be held in treasury to hedge awards to executives under the group’s stock option plan.
In a product breakdown for last year, jewelry sales rose 32 percent, while watch sales were up 31 percent. The Montblanc business increased 8 percent while the Other Businesses division, which includes Dunhill, Chloé and Net-a-porter, rose 27 percent. The fashion and accessories houses alone grew 18 percent, with Dunhill and Chloé among the biggest performers, the company said.
On the conference call, Lepeu said that Europe, which registered zero growth for the first quarter, according to Eurostat, and which is struggling with political turmoil in Greece, was faring well for Richemont. “The local clientele has not collapsed at all, especially in markets such as Germany, France and Switzerland,” Lepau said. He said domestic consumption in Europe was boosted by tourism “from many places, but mainly from China.”
Gary Saage, Richemont’s chief financial officer, said that in the U.S. the wholesale positioning of the watch brands has changed over the past few years, allowing Richemont to achieve bigger sales with fewer, high-quality partners.
He added that jewelry was also strong, and that both categories were benefiting from domestic tourism. “Tourists from Kansas City are traveling to Chicago, tourists from middle America are going to New York to shop. What we’re seeing is very strong domestic tourism,” he said.
Asked about the evolving euro crisis and the threat of Greece falling out of the currency, Lepeu said: “We’re all very concerned — and we should be. We’re paying a lot of attention to what is going on. We manufacture most of our products in Swiss francs, so exchange rates are affecting us. But there is not much we can do at our level. We need to be able to adapt with maximum agility to any new situation when it arrives.”
The company announced a cash dividend of 0.55 Swiss francs, or 59 cents, a share, to be paid at the annual general shareholders’ meeting in September. The dividend is 22 percent higher than last year, and the company said it is based on the good results in 2011-12.
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