By Samantha Conti
with contributions from Miles Socha
 on October 29, 2019
Inside the revamped Cartier Old Bond Street boutique

LONDON — All eyes are on Richemont, but not because of its new deal with Alber Elbaz.

Markets are aflutter with the now-confirmed speculation that LVMH Moët Hennessy Louis Vuitton is making a play for Tiffany & Co., and the impact that could have on Cartier parent Compagnie Financière Richemont, which dominates the hard luxury sector.

On Monday, Richemont’s shares closed up 2.4 percent to 76.78 Swiss francs, while those in LVMH slipped as the company confirmed it had held “preliminary” talks about a takeover of Tiffany.

Instead of debating the merits of the new joint venture with Elbaz, known as AZfashion, observers were asking what sort of pressure a tie-up between LVMH and the New York-based Tiffany & Co. could place on Richemont, especially in the U.S., where LVMH has room to expand its hard luxury offer, and where it is fast making inroads.

Two weeks ago, LVMH chief Bernard Arnault cut the ribbon on a Louis Vuitton leather goods workshop in Texas, together with President Donald Trump.

The parent of Cartier and Van Cleef & Arpels derives some 80 percent of its earnings from fine jewelry, and 50 percent of its sales from those two fine jewelry brands alone. The high-end watch brands Richemont owns and the Montblanc brand generate more than 25 percent of the group’s sales, according to banks’ latest estimates.

In the first quarter, the U.S. was Richemont’s third-biggest market after Asia-Pacific and Europe. In the three months to June 30, sales in the region grew 16 percent to 698 million euros. At constant exchange they were up 10 percent in the period, in keeping with the pace of growth in Asia-Pacific.

In a flash response to speculation over the weekend that LVMH had Tiffany in its sights, Luca Solca of Bernstein said that if LVMH manages to buy Tiffany & Co., the implication is that Richemont would be facing stronger competitive pressure in its home category.

“The widely held impression from channel checks is that Bulgari has gained market share against Cartier in the past few years. Combining Bulgari and Tiffany could make LVMH an even stronger contender in jewelry, even if Richemont holds the top brand with Cartier, and probably the best high-end brand with Van Cleef & Arpels,” Solca wrote on Sunday.

RBC’s Rogerio Fujimori didn’t touch upon the potential LVMH tie-up with Tiffany in his Monday Richemont report. Instead, Fujimori focused on the impact of the Hong Kong protests on sales in anticipation of Richemont’s interim results statement on Nov. 8.

“Weakness in Hong Kong should be a major headache for Richemont” in the full year, he wrote, adding that the long-term appeal of Cartier and Van Cleef remains the ultimate reason to own the stock.

As for the impact of Hong Kong, RBC has trimmed its full-year EBIT forecasts for fiscal 2020 and 2021 by 2 percent, mainly reflecting a larger impact from the present disruption in Hong Kong, which represents 11 percent of Richemont’s global sales.

Fujimori said the decline should be only partially offset by strength in Mainland China, which also generates 11 percent of global sales, and other Asian countries like Korea, which kicks in 5 percent of sales. The bank’s expectation is for improving trends in Europe.

He also pointed out that Richemont shares have declined by about 10 percent since the end of June, when the protests in Hong Kong started to escalate, and that most investors seem to expect the region to remain “a big drag” in the coming quarters.

All that global news swept the Elbaz joint venuture — which had been revealed in a short statement early Friday evening — straight to the sidelines.

As reported, the two parties have formed a company known as AZfashion, a from-scratch project aimed at wardrobe “solutions” for women.

Richemont described AZfashion as “an innovative and dynamic start-up, meant to turn dreams into reality,” while Elbaz said the project would help him to establish “my ‘dream factory,’ which will focus on developing solutions for women of our times.”

Asked by WWD over the weekend for his take on the joint venture, Solca was positive.

“Alber Elbaz is recognized as a genius, and he ended up at the margin of the industry for the wrong reasons. Richemont is an outsider in fashion, as they have a small toe in the water in comparison to groups with bigger brands and businesses in it. In a sense, then, it makes a lot of sense for them to team up with someone like Alber.”

Solca added that what the partners may be planning to do “is not very clear.” He also speculated whether the new venture may leverage distribution on Yoox Net-a-porter, another of Richemont’s properties.

“It may even move to Alber playing a role on one or more of the Richemont brands in fashion and leather goods,” Solca said.

But the move left some in the industry scratching their heads and wondering why Richemont’s chief Johann Rupert didn’t just hire Elbaz outright to helm one of the fashion maisons instead of investing in a start-up, which isn’t Richemont’s modus operandi. That said, the company did ink a joint venture distribution deal with Alibaba for Net-a-porter and Mr Porter last year.

As reported, Rupert wants to work closely with Elbaz, but on more of a philosophical level: “His talent and inventiveness, with his sensitivity toward women and their well-being, will be of great value to our group and its maisons. We warmly welcome Alber to Richemont, and look forward to an exciting partnership,” Rupert said.

Fashion, lifestyle and accessories is Richemont’s smallest division, and includes brands such as Chloé, Dunhill, Alaïa and Peter Millar. In the April-to-June period, the division saw sales contract 3 percent, mostly due to the disposal of Lancel in 2018.

One industry observer who spoke on condition of anonymity speculated that by inking the deal with Elbaz, Richemont wants to burnish its credentials in the sector, “and to play in fashion’s premier league. If Richemont really wants to have pulling power in fashion, though, it will need to invest seriously in this new project, and install a proper manager at the helm.”

Although Elbaz did not respond to WWD requests for comment about the new venture, it is understood that the Richemont deal happened quickly, with Rupert smitten with Elbaz’s ideas, approach and eagerness to explore myriad product categories outside fashion, such as tech.

Elbaz is already said to be recruiting a team, including managers, for the start-up, which may well grab all the headlines, when it launches.

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