There’s no luxury upturn in sight.
This story first appeared in the September 15, 2016 issue of WWD. Subscribe Today.
Fears about the future of luxury goods sales sent shares of Hermès, Compagnie Financière Richemont and Tod’s Group SpA plummeting, with the companies offering less-than-rosy outlooks for fiscal 2016-17.
In mid-morning trading on Wednesday, shares in Hermès nosedived 7 percent to 360.10 euros, or $404.42, despite the company reporting a 13 percent leap in net profits in the fist half — and a record operating margin of 33.9 percent of sales.
Shares in Compagnie Financière Richemont fell 3 percent to 58 Swiss francs, after the company warned that operating profit in the first six months would be down 45 percent, with first-half profit following suit.
Richemont closed down 3.9 percent at 57.45 Swiss francs, or $59, while Hermès finished the day 8.8 percent lower at 353 euros, or $396.44. Tod’s, which reported its first-half results after the market, saw its shares drop 3.7 percent to 51.30 euros, or $57.46.
Although the companies’ balance sheets may have had different stories to tell — Hermès sales and profits rose while Richemont’s and Tod’s fell — there’s one narrative that’s similar: Life is getting tougher for purveyors of high-end goods.
Although it had positive news to offer on Wednesday, Hermès told the markets it would no longer supply any specific figures for future growth “due to the reinforcement of economic, geopolitical and monetary uncertainties around the world.”
Richemont’s outlook was more grim: “We are of the view that the current negative environment as a whole is unlikely to reverse in the short-term,” the company said in a trading statement for the first five months of fiscal 2016-17.
The parent of brands including Cartier, IWC and Dunhill said the drop in operating profit comes as a result of a 14 percent decline in sales in the five months as well as one-off restructuring charges of approximately 65 million euros, or $73 million, and the additional impact of watch destocking.
Six-month profits will also be impacted, it said, by exchange rate movements, interest, taxation and discontinued operations.
Richemont had been bracing for a tough 2016-17 — and that’s just what it’s getting. The negative trends that began emerging a year ago are gaining momentum, with high-end watch sales showing no signs of recovery, and Richemont forced to take back some of their latest watch models from third-party retailers, and melt them down.
Luca Solca, managing director at Exane BNP Paribas, offered a pinpoint of optimism amid the gloom, saying in a report there are “initial signs” that the watches sell-out has found a trough.
“The questions are ‘How sanguine is this rebound going to be?’ and ‘When is it going to impact watch brands?’ as retailers have yet to significantly destock.”
Solca said he’s confident that, “at one point,” Richemont’s retail sales will turn positive and wholesalers will start restocking watches.
“I anticipate the former may appear in [the second half of Richemont’s fiscal 2017], while the latter may come in [the first half of Richemont’s fiscal 2018].”
Richemont’s sales in the April to August period were down 13 percent at constant rates and 14 percent at actual ones.
Excluding the exceptional watch returns from retail partners, constant currency sales decreased by 10 percent for the period.
In the five months, sales in all geographic regions were down at constant and actual exchange rates, with those in Europe, Asia-Pacific, Japan, the Middle East and Africa falling in the double digits at actual exchange.
Retail and wholesale sales were both down, while sales at Richemont’s jewelry brands sank 16 percent and those at the specialist watchmakers were down 19 percent at actual rates.
Richemont’s other businesses reported overall sales growth of 2 percent, due to positive performances at Montblanc, Chloé, Azzedine Alaïa and Peter Millar, the company said.
Richemont said the U.K. has shown growth since the weakening of sterling following the European Union referendum, while sales were down in France, due to a significantly lower level of tourist activity.
The Americas saw positive momentum in both jewelry and accessories, but an overall decline in sales due to a weaker performance in watches.
The company added that growth in mainland China and South Korea was “more than offset” by the continuing weakness of the Hong Kong and Macau markets, while Japan reported significantly lower sales against very high comparative figures.
The strength of the yen also depressed tourist spending in the country, with a noticeable impact on sales, Richemont said.
Tod’s reiterated its guidance for the year, expressing optimism that the steps it has taken to focus the group on footwear and accessories and trim its store count will have a positive effect in the second six months. In the six months ended June 30, the Italian luxury goods group saw net profit drop 25.6 percent to 37.4 million euros, or $41.8 million, from 50.3 million euros, or $58.8 million, in the same period last year.
As reported in July, the group registered a 3.4 percent decline in sales in the first half to 497.6 million euros, or $557.3 million, compared with 515.3 million euros, or $603 million, in the same period last year. At constant exchange rates and including the related effects of hedging contracts, sales would have been down 4.3 percent.
Although Hermès had a far better first half, it’s clearly not immune to the world’s geopolitical troubles and the slowdown in high-end luxury.
Axel Dumas, the company’s chief executive officer, told analysts and journalists at the company’s Paris headquarters, that tourists are shunning Paris in favor of Milan and London for their luxury shopping excursions.
He declined to pinpoint sales trends in July and August, but suggested the greater momentum in the second quarter would continue into the third.
“I’m optimistic enough that we can outperform the market,” he said, although he would not provide any specifics.
Hermès would only say it had “an ambitious goal for sales growth at constant exchange rates.” Previously, it had set a medium-term goal of around 8 percent revenue growth at constant exchange rates.
Dumas said mainland China continues to progress strongly, in contrast to Hong Kong, “which remains complex, and Macau, which is difficult.”
Echoing other luxury players, he characterized business in the U.S. as “complex,” highlighting the “difficult retail environment” and the impact of a strong dollar, which is curbing tourist flows.
Sounding sanguine, Dumas stressed that Hermès would not engage in “price marketing” and would continue to hedge its bets on creative products made with exceptional savoir faire.
Thanks partly to favorable currency hedging, Hermès International saw first-half net income climb 13 percent to 545 million euros, or $608.2 million.
Operating profits in the six months to June 30 improved 11 percent to 827 million euros, or $922.8 million.
Dollar figures have been converted from euros at average exchange rates.
Hermès had previously released sales data for the first half, registering a 6.2 percent revenue gain in the second quarter to 1.25 billion euros, or $1.39 billion.
The company noted that production capacity for leather goods is set to grow 8 percent as it hires and trains more artisans, and adds more production facilities.