LONDON — Are storm clouds gathering over luxury?
It’s hard to tell, say principals at Compagnie Financière Richemont. There is still volatility in China, growth is slowing in the go-go U.S. market, and COVID-19 continues to impact consumer behavior.
Despite all of that, demand for high-end watches, jewelry and accessories remains robust, said Richemont, which posted a strong set of results for the fiscal first half ended Sept. 30.
At actual exchange rates, Richemont saw a 24 percent rise in sales to 9.68 billion euros, and a 40 percent spike in profit from continuing operations to 2.11 billion euros.
On Friday, Richemont’s shares surged more than 10 percent to close at 118.10 Swiss francs.
The parent of brands including Cartier, IWC and Chloé reported a 766 million euros loss in the six months due to a noncash write-down of assets linked to its proposed sale of Yoox Net-a-porter Group to Farfetch and Alabbar.
The deal, revealed in August, will see Farfetch eventually take control of YNAP, while Richemont and Farfetch will work together on e-commerce and other digital strategies. As part of the deal, Richemont will also take a minority stake in Farfetch.
While Richemont managers spoke at length about volatility and a lack of visibility in the market right now, one thing is certain: COVID-19 continues to reshape consumption patterns worldwide for better, and worse.
In the U.S., pent-up demand from lockdown is fueling sales, while Chinese spending remains hobbled by ongoing COVID-19 restrictions.
With people traveling less, cultivating the local customer remains a priority for Richemont and its peers. Burkhart Grund, the group’s chief finance officer, said “today, demand is driven by local customers, in Japan, Europe and the U.S.”
Indeed, Richemont said consumption patterns have changed so dramatically post-COVID-19 that no single geography is driving revenue or dominating the balance sheet. In the first half, the U.S., Europe and China generated a similar level of sales, around 2 billion euros each.
While the demand is there, the visibility on future trends remains unclear.
Regarding China specifically, Grund said “demand is still there, but it’s disrupted due to lockdown. Until there is a drastic change to China’s zero-COVID[-19] policy, the situation in the region remains difficult to read.”
On Friday, just as Richemont was delivering its first-half results, China unveiled plans to reduce the number of COVID-19 quarantine days to five from seven, an indication the government is slowly beginning to ease restrictions on its “dynamic zero” COVID-19 policies.
China isn’t the only market that’s proving difficult to read.
Richemont chairman Johann Rupert said it remains “highly uncertain how the political, economic and social landscapes will evolve in Europe and in our other key markets. We only know that we will likely face volatile times ahead as central banks seek to rein in inflation while governments try to manage severe cost of living pressures.”
Despite the lack of visibility in China and elsewhere, Rupert argued that Richemont is in “good health, with a clear strategy, highly desirable and enduring creations, strong maisons, professional teams and a robust balance sheet.”
Rupert said those assets will enable the luxury giant to weather “uncertain times, allowing us to look to the future with a mix of vigilance, and confidence.”
He has many reasons to be bullish.
In the first half, operating profit was up 26 percent to 2.72 billion euros, with chunky, double-digit profit margins in the watch and jewelry divisions. The company closed the half with a net cash position of 4.8 billion euros.
Sales at Richemont’s jewelry maisons rose 24 percent at actual rates, with watches growing 22 percent. Richemont said three of its watch brands, understood to be IWC, Vacheron Constantin and Jaeger-LeCoultre, are set to hit 1 billion euros in sales this year.
Sales at the fashion and accessories division (which no longer includes YNAP) surged 27 percent.
In his overview, Rupert said Chloé, Montblanc and Peter Millar contributed most to the 27 percent sales increase, while Delvaux generated the sharpest growth rate in sales.
“We are carefully nurturing this promising maison for the long term,” said Rupert, referring to Delvaux, which Richemont purchased in 2021.
Richemont said it saw double-digit gains, at actual exchange rates, across all business areas, channels and regions excluding Asia-Pacific where sales grew by 3 percent, hampered by restrictions on travel and movement in China.
Analysts gave Richemont’s first-half performance a big thumbs-up.
In its report, Royal Bank of Canada pointed to the “high quality and broad-based growth across the Richemont portfolio,” while Luca Solca of Bernstein said the numbers show that “luxury goods demand remained buoyant over the summer.”
Barclays said the jewelry division performed far better than it had expected. It grew 21 percent at constant exchange in the second quarter of the year versus consensus projections of 13 percent. The margin of earnings before interest and taxes for the jewelry division was 37.1 percent versus Barclay’s forecast of 35.6 percent.
On calls with media and analysts, Richemont executives said customers have been “upsizing” and “upscaling” their purchases, buying watches and jewelry with “tangible, durable value” and placing their names on waiting lists for new styles and collections from a variety of brands.
That’s happening despite price increases of around 4 to 8 percent across the brands this year.
As usual, Richemont executives did not comment on current trading, but third-quarter sales trends are understood to be in line with those of the previous quarter.
Asked about growth trends in the U.S., Jérôme Lambert, Richemont’s chief executive officer, said while the numbers are still strong, “we’re seeing less remarkable growth in the region.”
Richemont is coming up against strong comparative figures in the third quarter, and said it expects the growth rate in the U.S. to begin “normalizing.”
The company added that it is seeing “some signs” of recession in the U.S., but luxury is doing just fine, and the cost-of-living crisis is not impacting the group’s consumers.
During the presentation, Grund said Richemont’s proposed sale of a majority stake in YNAP to Farfetch and Alabbar is awaiting antitrust approval, which is expected to take up to one year. The initial stage of the transaction is expected to complete before the end of calendar year 2023.
As reported, Farfetch and Alabbar have agreed to acquire 47.5 percent and 3.2 percent, respectively, of YNAP, leaving Richemont holding 49.3 percent. Rupert reiterated that the deal will “realize my long-standing goal of making YNAP a neutral industry-wide platform, with no controlling shareholder.”
In exchange, Richemont will receive Farfetch shares, expected to represent 12 to 13 percent of Farfetch’s issued share capital. The two partners plan to work together to accelerate the quality and global penetration of the Richemont brands online.
The Richemont brands plan to adopt Farfetch’s technology “to achieve efficiency, flexibility and speed in addressing our clients’ needs, getting our products to the right place, at the right time, in a seamless manner.” YNAP will adopt Farfetch Platform Solutions to “enhance its prospects,” according to Richemont.
In the first half, Richemont booked a 2.9 billion euro loss from discontinued operations following the 2.7 billion euros noncash write-down of YNAP net assets. Ahead of the proposed sale, Richemont has reclassified YNAP as a “discontinued operation” on its books.
In the first half, YNAP saw sales grow by 11 percent at actual exchange rates and by 4 percent at constant exchange. Richemont said growth was led by Net-a-porter and Mr Porter, with “marked performances” in the U.K. and the U.S.
Yoox revenues grew midsingle digit. The Outnet, which launched in the U.S. in May, was impacted by reduced product availability and increased competition. At FengMao, Richemont’s venture with Alibaba in China, revenues grew at high double digits compared to the prior-year period.
On Friday, the company also said Patricia Gandji will join the group’s senior executive committee in her capacity as chief people officer and CEO of Regions. Gandji will continue to report to the company’s CEO, Lambert.