A gold and coral 'Alhambra' necklace by Van Cleef & Arpels, sold by Sotheby's for $68,750 while estimated at $15,000 to $20,000.

LONDON — Demand in China might be robust, but the region could deliver some surprises in the next months due to zigzagging exchange rates, trade disputes and the weather impacting how and where those from China will be shopping, said Richemont as it delivered its first-half results on Friday.

Johann Rupert, chairman of Compagnie Financière Richemont, pointed to a “growing volatility” in consumer demand, partly attributable to an “uncertain economic and geopolitical climate,” as the company reported a 21 percent uptick in sales to 6.81 billion euros.

Stripping out the impact of newly acquired companies Yoox Net-a-porter and Watchfinder, sales in the six months to Sept. 30 grew 6 percent at actual exchange rates and 8 percent at constant ones.

That’s lower than the 10 percent growth at constant rates Richemont notched in the first five months, and lower than analysts had expected. It also indicates a slowdown in demand in September.

During a conference call Friday, the company said September had its own particular set of challenges, while October saw a return to the growth trends seen at the start of the first half.

Some of that volatility is coming from China, an 18 billion euro market — and a region of shifting demand.

The Santos de Cartier watch.  Courtesy/Vincent Wulveryck

During the conference call, Richemont’s chief financial officer Burkhart Grund described China as a tale of two countries.

“What we are seeing are two Chinese businesses, domestic and travel, with travel three times higher than the domestic. We’re quite happy with domestic Chinese consumption: It remains strong and expanding,” he said.

In the six months, sales in Asia-Pacific overall increased by 20 percent to 2.55 billion euros, with the region generating 37 percent of Richemont’s sales.

Excluding YNAP and Watchfinder, sales in Asia-Pacific were up 14 percent, with high single-digit growth in Mainland China, and double-digit increases in Hong Kong, Macau and Korea.

While Grund may be confident about the momentum in Mainland China, he said Chinese tourist consumption — which grew in the double digits over the past six months — was more difficult to predict.

He pointed to the renminbi, which has been weakening since the summer. “The question is where exchange rates are going to go if a trade war plays out, and how that will impact the business.”

He added that Chinese tourists are arbitrage experts and will travel to regions where they know they can get a deal, especially given all the price transparency in the market. They’ll cancel a trip to Europe “overnight,” he said, if they know they can get a better rate of exchange or better prices elsewhere.

Asia brought more challenges in the first half. Grund said Richemont had to close some of its stores for a couple of days in September due to typhoon Mangkhut, which started in the Philippines, swept through Thailand and southern China and ended in Hong Kong.

“That had an effect on our regional tourism in September,” he said, adding that 50 percent of Richemont’s overall business comes from tourism, which makes it vulnerable to dynamics such as the weather — and to currency movements.

Inside the Cartier boutique in Harrods.  Courtesy Photo

Consumer volatility is just one challenge Richemont is facing.

First-half growth figures fell short of analysts’ projections, and it’s clear the group has a big job ahead integrating YNAP, which grew in the double digits, but brought an operating loss to the balance sheet.

Richemont’s sales and profit figures in the first six months were inflated by the addition of YNAP and Watchfinder to the portfolio, and stripping them out revealed a few trouble spots, mostly at the operating level.

Reported profit for the period rose 131 percent to 2.25 billion euros, primarily due to a posttax, noncash gain of 1.38 billion euros after the revaluation of Richemont’s existing YNAP shares when it acquired 100 percent of the e-commerce site earlier this year.

Richemont’s operating profit dropped 3 percent to 1.13 billion euros, which the company said came from an increase in costs related to the acquisition and consolidation of YNAP and Watchfinder and to the sale of the leather goods business Lancel.

Together, YNAP and Watchfinder recorded a 115 million euro loss in the period, which Richemont said was related to the amortization of intangible assets recognized on acquisitions.

Operating profit in the specialist watchmaking division was down 3 percent to 286 million euros, which Richemont said was due to inventory reductions and efforts to keep a lid on costs.

Grund said the company was upgrading the wholesale network, monitoring its sales to third parties and seeking to “undersupply” the market in a bid to create a sense of desirability as the rhythm of demand slows.

Jewelry, namely Cartier and Van Cleef & Arpels, was a high point, with operating profit up 19 percent to 1.17 billion euros on sales that rose 9 percent to 3.45 billion euros. Richemont said the relaunched Panthère and Santos watch collections as well as the Alhambra 50th anniversary pieces at Van Cleef were big growth drivers.

Overall, there were double-digit increases in the brands’ directly operated boutiques and online stores and all regions, with the exception of the Middle East and Africa, which saw higher sales. Hong Kong, Korea, and the U.S. all notched double-digit increases.

It’s been a busy 2018 for Richemont, which moved mountains on the digital front, buying 100 percent of YNAP, taking control of Watchfinder and sealing a deal with Alibaba that will take YNAP to Chinese Mainlanders and tourists. It also sold Lancel, the French leather goods business, to Piquadro in a bid to sharpen its overall portfolio.

Those moves didn’t come cheaply: Richemont cut into its formidable cash pile, spending in excess of 3 billion euros on YNAP and Watchfinder. It now has a net cash position of 1.58 billion euros.

Asked on the call about Richemont’s future plans, Grund said M&A was not at the top of the agenda. “The focus now is on making Richemont’s digital shift a reality,” he said.

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