LONDON — In an unexpected move that still managed to put a smile on analysts’ faces, Compagnie Financière Richemont AG warned Thursday that its operating profits could fall by up to 40 percent in the year ending March 31 and said it planned to scale back its loss-making Dunhill and Lancel businesses in the U.S.

This story first appeared in the March 21, 2003 issue of WWD. Subscribe Today.

The Swiss luxury group said in a statement that the fall stems from the depressed economic climate, eroding consumer confidence, and the weakening of the dollar against the yen and the euro.

The drop will also stem from a hefty restructuring charge of $53 million linked to the Dunhill and Lancel brands. In the fiscal year ending March 2002, operating profit was $511 million on sales of $4.09 billion. Figures are quoted at current exchange rates.

Richemont said it planned to downsize Dunhill’s retail operations in the U.S. and focus largely on wholesale activities in that market. As for Lancel, the company said it would eliminate certain loss-making activities in Belgium, the U.S. and elsewhere.

The group, the second largest in the world behind LVMH Moët Hennessy Louis Vuitton, also cited soft demand for jewelry and watches as another reason for the profit warning. Watches account for 46 percent of sales while jewelry generates 22 percent of sales. The outlook for the rest of this year — at least for watches — is cloudy.

After declining even more sharply, shares in Richemont finished down $1.15, or 7.7 percent, to $14.93 in Geneva. The company’s shares have dropped 21 percent this year alone.

Despite the steep price decline, analysts generally welcomed Richemont’s announcement as a much-needed change in strategy. “Richemont was in denial about the Dunhill and Lancel businesses, which are incurring massive losses. They needed to make some tough decisions, and now they’re on the road to recovery,” said Andrew Gowen, an analyst at Lehman Brothers in London.

The businesses were losing a total of $106 million annually, Gowen said, and Richemont desperately needed to do something. “It’s as if they’ve gone into the A.A. meeting now and finally admitted that something is wrong. I think their announcement today was fabulous.”

Gowen had projected a 21 percent dip in operating profits for the year, anyway — before calculating in the $53 million charge. Including the charge, he estimated that Richemont will post profits that are 33 percent — rather than 40 percent — lower than last year’s. He’d also already factored in a 2 percent decline in jewelry sales and a 1 percent decline in watch sales for Richemont’s fiscal year.

Antoine Colonna, an analyst for Merrill Lynch in Paris, said Richemont has taken a big step forward with Dunhill and Lancel. “What we heard today was good news. But we believe that Richemont has to do more. It’s not enough to downsize those businesses. That’s just a defensive measure. I want to know about their offensive measures, like how they are going to rejuvenate the brands. What are the marketing policies? What are the new strategies?”

Colonna was even more bearish than his counterpart at Lehman Brothers. Before Thursday’s announcement, he had been projecting a 30 percent drop in operating profits for the fiscal year.

“Richemont had been telling us for weeks that the numbers were not going to be good. Granted, this company is known for being conservative and their guidance to analysts is qualitative rather than quantitative. But experience has taught us to believe them when they talk,” he said.

Dunhill has been a problem for Richemont for almost a decade. Two years ago, Richemont embarked on a relaunch for Dunhill with a new logo that changed the name to dunhill’. Plans included a worldwide rollout of 250 new-generation stores over a five-year period and an updated mix of men’s wear and accessories, with a focus on its heritage as both a motoring and tobacco brand. The company’s goal has been to remove Dunhill from its reliance on sales in Asia and restore it to its roots as a quirky, man-of-leisure brand.

Indeed, less than a month ago, it appeared all plans were on track. Dunhill’s chief executive Simon Critchell gave a talk at the Luxury Briefing Symposium in London where he discussed the relaunch strategy and the brand’s new store at 15 Rue de la Paix in Paris.

On Wednesday, Goldman Sachs issued a report on the watch industry, saying that inventory levels are too high and retailer behavior will remain cautious in 2003. The Goldman team surveyed global watch retailers about the best-and worst-performing brands, price points and inventory levels.

They concluded that only 18 percent of retailers expected to see sales grow 5 percent or more over the next 12 months, and 52 percent said their inventory level is now higher than a year ago. “Given the low expectations for sales growth,” the Goldman Sachs report said, “43 percent say they plan to cut inventory over the next 12 months, compared to a mere 3 percent who plan to increase it.”

However, the report said that Richemont’s Cartier and Jaeger-LeCoultre brands were holding up well. “Cartier remains the most important brand for Richemont in terms of sales and earnings, and the second-largest brand in terms of sales, behind Rolex,” the report said.

Analysts said Richemont’s profit downgrade was not a harbinger of more bad news for the sector, however.

“I don’t expect to see any more profit warnings,” said Gowen. “Most of the luxury houses have already reported their profits. LVMH [Moët Hennessy Louis Vuitton] has already taken care of its brand portfolio restructuring and is reaping the benefits of it, while Gucci has issued its profit warnings. We all know that conditions are tough in the sector,” said Gowen.

Colonna said that Richemont’s earnings projections needed to come down. “We were at the lowest end of the scale of analysts’ projections, below the market consensus. A lot of people did not believe that Richemont was going to be a big drop in operating profit, but they were wrong.”

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