LONDON — Richemont can’t wait until fall arrives.
After a dismal 2015-16 fiscal year due to abrupt changes in tourism and ongoing problems in Hong Kong that forced the luxury group to buy back watches and melt them down, Compagnie Financière Richemont SA is looking toward October as the earliest it might see any uptick — and not because business will be getting better but because annual comparatives will start to get a little easier.
The current year has begun with a whimper, although sales growth in the month of April declined in the double digits. That drop was on top of a tough fiscal 2016. Richemont’s profit for the year ended March 31 rose 67 percent to 2.23 billion euros, or $2.45 billion, while sales increased 6.4 percent to 11.08 billion euros, or $12.19 billion on a reported basis.
But the underlying figures tell another story: Profits were propped up by gains from the merger last year of Net-a-porter with Yoox, while the luxury giant also benefited from the non-recurrence of losses due to the revaluation of the Swiss franc in January 2015.
The merger and formation of Yoox Net-a-porter Group, now listed on the Milan Bourse, drove a one-off, non-cash, pre- and post-tax accounting gain of 639 million pounds, or $703 million, in the year. Following the completion of the rights issue by the Emaar Properties Group earlier this year, Richemont’s equity interest in YNAP is now 49 percent, and it holds 25 percent of the voting rights.
Operating profit for the year was down 23 percent. Excluding one-off charges and a gain from a real estate disposal in the prior year, it fell 11 percent to 2.06 billion euros, or $2.27 billion. Sales on a constant currency basis were down 1 percent. In the full year, first-half sales growth was in the double digits, followed by declines in the second half.
“Our concerns over geopolitical risks and the impact on the behavior of our clients proved justified,” said the company’s chairman Johann Rupert. “Europe turned negative in mid-year, and trading conditions in Hong Kong and Macau remained difficult. Only mainland China showed good growth.”
In the month of April, the start of the new fiscal year, sales declined by 18 percent and 15 percent on a reported and constant rates basis, respectively, with all regions delivering sales declines. Rupert said the performance was largely anticipated.
He said Asia-Pacific, Richemont’s largest sales region, remains weak due to “no recovery” in the famously high-margin markets of Hong Kong and Macau. The figures were only partially offset by continued improvement in mainland China, which was up 26 percent on a constant-rate basis in the month.
Following the announcement, Richemont’s shares were down 2 percent to 60.35 Swiss francs, or $61.03. Richemont shares closed down 4.3 percent at 58.95 Swiss francs, or $59.62.
Dollar figures have been converted at average exchange rates for the periods to which they refer.
During a conference call, Richemont’s chief executive officer Richard Lepeu said the ongoing crisis in Hong Kong — due partly to shrinking footfall from Chinese tourists; a government crackdown on bribery, and prices that were too high — forced the company into buying back some of its watches and, in certain cases, making them disappear.
“It’s happening primarily in Hong Kong — not in the U.S. or the U.K. Some of the watches are bought back from the dealers and relocated to other regions, while others are taken off the market and dismantled. The diamonds are collected and the gold is melted down,” he said.
Lepeu, who described the year’s overall performance as “disappointing,” declined to say how much watch stock was bought back from the dealers, but said the move was “exceptional” and aimed at preserving the quality of the inventory and helping the group’s partners in Hong Kong.
“Dealers have been facing a significant decrease in demand for watches due to the anticorruption measures,” said Lepeu, adding that the strengthening of the Hong Kong dollar also meant that prices could not compete with those in Europe and Japan.
Gary Saage, Richemont’s chief financial officer, added during the call that the watches most likely to be dismantled are newer models that are not proving popular on the shop floor.
Asked why Richemont doesn’t simply store the watches in a vault and wait for better times, Saage said: “We tend to recycle commodities,” rather than take a view on the appeal of certain styles and prices going forward.
In a report published on Friday, Citi’s Thomas Chauvet pointed out that Richemont and its competitors can no longer rely on Hong Kong and Macau to generate watch sales.
“Richemont benefited from the watch ‘supercycle’ between 2004 and 2012. During that exceptional growth cycle, watch players added a lot of new wholesale doors (and channeled possibly too much inventory through third-party distribution); enhanced the mix with the launch of more expensive products (larger, more sophisticated and precious watches), and applied aggressive ‘like-for-like’ pricing in world of production capacity bottlenecks,” Chauvet wrote.
“With the political leadership change in  in China and the China GDP slowdown, the entire watch category stopped growing. An estimated 17 percent of the world’s GDP [Greater China] cannot consume 50 percent of the world’s luxury watches forever. In this new era, post-corruption crackdown, Richemont and its peers operate in a low-growth environment with greater competition [Apple Watch]; more limited pricing power, production overcapacity, and limited retail expansion, particularly in wholesale,” he added.
Chauvet also pointed out in his report that of the Richemont watch brands, IWC and Panerai were outperforming, while Piaget and Vacheron Constantin were proving a more difficult sell.
In fiscal 2015-16 Richemont’s other product categories fared far better, with jewelry, leather goods and clothing all notching growth. The jewelry houses — Cartier, Van Cleef & Arpels and Giampiero Bodino — saw sales rise 7 percent while sales by the specialist watchmakers were up 3 percent and those in other categories rose 11 percent.
Asked on the call about the fashion houses’ performances, Saage said it was uneven.
Richemont reported that operating losses in the “Other” products division increased to 94 million euros, or $103.4 million, excluding a one-off gain from a property disposal. The company said the losses were largely attributable to the performances at Dunhill and Lancel.
He said Chloé did “extremely well,” with leather bags enjoying a strong momentum during the year. The high-end, golf-focused brand Peter Millar also outperformed, “despite the difficulties in the U.S. with specialty retailers,” and the golf merchandise remains strong, Saage said. Overall the U.S. and Americas region remained “subdued” with soft watch sales offset by jewelry and clothing.
Montblanc also performed strongly, with a re-visited product offer and good organic sales growth thanks to leather goods and writing instruments.
Saage said Azzedine Alaïa’s performance was “fine,” although he described Dunhill as “difficult.” A “collective internal team” is now designing the Dunhill collections following the departure of John Ray as creative director earlier this year. There were two net Dunhill store closures last year, while 10 closures are planned for the 2016-17 year.
Regarding Lancel, Saage said the products, management team and new store concept were on target, but the label is suffering from being based in France, where tourism and consumer appetites have dwindled since the terrorist attacks last November.
Shrinking tourist numbers in Europe played a big role in the sales decline in the second half, helping to offset the gains of the first part of the year. Lepeu said sales in the region were “very disrupted by the events in Europe,” with the feel-good factor of the first half evaporating amid urgent safety concerns.
“Since the events in November, Europe is no longer a destination for tourists, and it will be several months before it recovers,” barring any more incidents, he said.
At reported exchange rates, sales in Europe were up 10 percent in the year; 16 percent in the Middle East and Africa; 10 percent in the Americas; and 27 percent in Japan. They fell 4 percent in Asia-Pacific.
In the last fiscal year, Japan presented problems of its own, with the stronger yen keeping the 0nce-enthusiastic Chinese shoppers at bay. With regard to the Chinese, Lepeu said there now is a “rebalancing” taking place between purchases abroad and those at home, and they are generally buying less when they travel.
In response to the challenges, Richemont said it would continue to “tightly monitor” costs and working capital requirements, and allocate resources in a “highly selective manner.”
On the call Lepeu said there would be no further layoffs this year. Last year, Richemont slashed its Swiss watchmaking workforce of 9,000 by about 5 percent in response to the slowdown in demand. He added that prices would also remain stable.
The Richemont balance sheet remains strong: At the end of March, net cash amounted to 5.34 billion euros, or $5.87 billion, and the board has proposed a dividend of 1.70 Swiss francs, or $1.72, per share, up from 1.60 Swiss francs, or $1.62, per share last year.
While the short-term may be challenging, Rupert sees light on the horizon.
“We are confident in the long-term demand for high-quality products. The group remains committed to supporting its maisons to conceive, develop, manufacture and market products of beauty, individuality and the highest quality,” he said. “These values are enduring, and will see Richemont well-positioned to benefit from an improved market in the years to come.”