LONDON — It’s been a dreary year so far for Compagnie Financière Richemont — what with declining profits and sales, layoffs in Switzerland and watch buybacks — but the parent of Cartier and IWC turned a corner this week, reporting an uptick in third-quarter sales larger than analysts had projected.
On Thursday, Richemont beat expectations with a surprise 5.7 percent rise in third-quarter revenue, with the reopening of two key Cartier shops, in New York and Tokyo, the weak pound in Britain, and a strong showing in Mainland China and Korea all adding shine to the numbers.
Shares closed up 8.6 percent to 77 Swiss francs, or $76, on the Swiss stock exchange Thursday.
Although Richemont’s rebound came as a surprise after a dismal first half that saw a 51 percent decline in first-half profits, and a 12.6 percent drop in sales, analysts were expecting a modest recovery in the watch sector this year.
In a report earlier this week, Mario Ortelli of Bernstein Research said 2017 will be a better year generally for luxury goods, but not yet the “new norm.”
Bernstein expects the luxury market to grow 2 percent in 2017, advancing to a 4 percent annual growth rate in the medium term “as current headwinds slowly alleviate,” and the macroeconomic environment stabilizes.
Within hard luxury, the bank said it expects jewelry to grow 5 percent, outpacing watch growth, which is set to shrink 2 percent in 2017.
His projections were borne out in Richemont’s third quarter, where jewelry sales climbed 9 percent at reported rates and watch sales were down 2 percent in the three months to Dec. 31.
All regions, with the exception of Europe, saw better-than-expected growth at reported rates. (Europe grew at constant exchange). Retail sales were up 12 percent, compared with a 5 percent decline in the first six months, while wholesale was down 3 percent, better than analysts had expected.
Rogerio Fujimori of RBC Capital Markets has long been bullish on Richemont: He believes it has the strongest balance sheet in the sector, and said in a report that Thursday’s results mean it’s “back in business.”
Life can only get better for the luxury giant, according to Fujimori, who pointed to a “cleaner stock situation for watches,” improving trends in Greater China and the Americas, and a gradual margin recovery.
“Notwithstanding all difficulties in the last 15 months, we still see Cartier among the top five luxury brands in the sector for the foreseeable future,” he wrote. “We remain bullish on long-term prospects for jewelry, Cartier’s brand equity, and Van Cleef & Arpels’ competitive position in this category, which remains far less crowded than other luxury segments.
Fujimori said fewer than five global jewelry brands enjoy sales densities that are high enough to sustain EBIT margins, or earnings before interest and taxes, above 20 percent, and Cartier and Van Cleef & Arpels are two of them.
With regard to the Chinese customer, analysts had said the earlier Chinese New Year, which falls on Jan. 28, would only help luxury sales, and this year’s dates have clearly been an incentive to shop and travel.
Richemont noted Thursday that its third-quarter growth in Europe was primarily driven by “robust local sales and tourist purchases in the United Kingdom,” as well as by strong jewelry sales on the Continent.
Even more Chinese are set to flood London this month, with record numbers set to arrive in the first quarter, according to the travel analyst ForwardKeys and the tourist agency VisitBritain. The weaker pound, which has fallen 11 percent against the yuan since the Brexit referendum, and easier visa application process, are all luring the Chinese back to the U.K.
While the Chinese may be making a comeback there are those who urge caution — especially with regard to high-end watches.
In a report issued last week, Julian Easthope and Julie Zhuang noted that although there is positive momentum in the watch names, no single economic event could be blamed for the segment’s decline in 2016, raising the prospect that timepieces could simply be falling out of favor.
“Without a significant pickup in demand, we would expect continued margin contraction,” the analysts said. “We believe the industry remains oversupplied and capacity will need to be cut or capacity utilization will fall.”
Richemont is already on top of things, and is rapidly trying to readjust to changing times. Late last year, the company let go 170 employees at its Piaget and Vacheron Constantin brands, the second round of Swiss watch layoffs in a year.
It’s been shutting stores — or endeavoring to make them more efficient — taking back stock from watch retailers at the cost of 249 million euros, or $279 million, in the first half and trying to reshape the business for a new era of slower growth.
Although the company continues to invest in manufacturing, it is also looking to “gain efficiencies,” according to Gary Saage, Richemont’s chief financial officer.
“Before the gifting explosion in China, we were seeing modest growth in watches. We don’t know where sales are going to be in the future, but we can no longer expect a return to growth of 20-odd percent. We’re looking at this — and all parts of the business — on an ongoing basis,” he said in November during the first-half results presentation.
The company is also preparing the markets for some year-end blues.
Although business picked up in the third quarter, sales over the nine-month period to December declined by 6 percent at constant exchange rates, and by 7 percent at actual exchange rates.
The luxury giant warned that net profit for the year will face tough comparatives due to the prior year’s inclusion of a substantial non-cash gain relating to the merger of Net-a-porter with Yoox to form Yoox Net-a-porter Group, which is now listed on the Milan Bourse.