LONDON – Are storm clouds piling up on luxury?
It is difficult to say, say the directors of the Compagnie Financière Richemont. There is still volatility in China, growth is slowing in the US market, and COVID-19 continues to impact consumer behavior.
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Despite it all, demand for high-end watches, jewelry and accessories remains solid, said Richemont, which posted a solid track record for its fiscal first half ended September 30.
At actual exchange rates, Richemont recorded a 24% increase in sales to € 9.68 billion and a 40% increase in continuing operations profits to € 2.11 billion.
On Friday, Richemont shares rose more than 10% to close at 118.10 Swiss francs.
The parent company of brands including Cartier, IWC and Chloé recorded a loss of 766 million euros in six months due to a non-monetary devaluation of the activities linked to its proposed sale of Yoox Net-a-porter Group to Farfetch and Alabbar .
The deal, revealed in August, will see Farfetch eventually take control of YNAP, while Richemont and Farfetch will work together on e-commerce and other digital strategies. As part of the deal, Richemont will also acquire a minority stake in Farfetch.
While Richemont executives have long talked about volatility and lack of visibility in the market right now, one thing is certain: COVID-19 continues to reshape consumption patterns around the world for better and for worse.
In the US, pent-up demand from the bloc is fueling sales, while Chinese spending remains hampered by ongoing COVID-19 restrictions.
With people traveling less, nurturing the local customer remains a priority for Richemont and its colleagues. Burkhart Grund, the group’s chief finance officer, said that “today, demand is driven by local customers in Japan, Europe and the United States”
In fact, Richemont said consumption patterns have changed so dramatically since COVID-19 that no single geographic area is driving revenue or dominating the budget. In the first half of the year, the US, Europe and China generated a similar level of sales, around € 2 billion each.
While the demand is there, the visibility on future trends remains unclear.
Regarding China in particular, Grund said that “the demand is still there, but it is cut off due to the blockade. Until there is a drastic change in China’s zero-COVID.[-19] politics, the situation in the region remains difficult to read ”.
On Friday, just as Richemont was delivering first-half results, China unveiled plans to reduce the number of COVID-19 quarantine days to five from seven, an indication that the government is slowly starting to relax restrictions on its. “dynamic zero” COVID- 19 policies.
China isn’t the only market that’s proving difficult to read.
Richemont chairman Johann Rupert said it remains “very uncertain how the political, economic and social scenarios in Europe and our other key markets will evolve. We only know that we are likely to face unstable times in the future as central banks try to curb inflation while governments try to manage the severe pressures on the cost of living. ”
Despite the lack of visibility in China and elsewhere, Rupert said Richemont enjoys “good health, with a clear strategy, highly desirable and enduring creations, strong houses, professional teams and a solid balance sheet.”
Rupert said these assets will enable the luxury giant to withstand “uncertain times, allowing us to look to the future with a mix of vigilance and confidence.”
It has many reasons to be bullish.
In the first half, operating profit increased 26% to 2.72 billion euros, with substantial double-digit profit margins in the watch and jewelry divisions. The company closed the first half with a net cash position of 4.8 billion euros.
Sales of the Richemont jewelry houses increased 24% at effective rates, with watches up 22%. Richemont said that three of its watch brands, intended as IWC, Vacheron Constantin and Jaeger-LeCoultre, will reach one billion euros in sales this year.
Sales of the fashion and accessories division (which no longer includes YNAP) increased by 27%.
In his overview, Rupert said that Chloé, Montblanc and Peter Millar contributed the most to the 27% increase in sales, while Delvaux generated the sharpest sales growth rate.
“We are carefully nurturing this promising long-term house,” Rupert said of Delvaux, which Richemont bought in 2021.
Richemont said it posted double-digit earnings, at effective exchange rates, across all business areas, channels and regions excluding Asia-Pacific, where sales grew 3%, hampered by travel restrictions. and movements in China.
Analysts appreciated Richemont’s first-half performance.
In its report, the Royal Bank of Canada indicated “high quality and large-scale growth across the Richemont portfolio,” while Bernstein’s Luca Solca said the numbers show that “demand for luxury goods remained lively during the summer “.
Barclays said the jewelry division performed much better than expected. It grew 21% at constant exchange rates in the second quarter of the year compared to consensus projections of 13%. The profit margin before interest and taxes for the jewelry division was 37.1% compared to Barclay’s forecast of 35.6%.
During phone calls with media and analysts, Richemont executives said customers are “upsizing” and “upscaling” their purchases, buying watches and jewelry of “tangible and lasting value” and putting their names on lists of products. waiting for new styles and collections from a variety of brands.
This is happening despite price increases of around 4-8% between brands this year.
As usual, Richemont executives have not commented on ongoing negotiations, but third quarter sales are believed to be in line with the previous quarter.
Asked about growth trends in the US, Jérôme Lambert, CEO of Richemont, said that while the numbers are still strong, “we are seeing less noticeable growth in the region.”
Richemont is confronted with strong comparative data in the third quarter and said it expects the growth rate in the United States to start “normalizing”.
The company added that it is seeing “some signs” of recession in the United States, but luxury is doing well and the cost of living crisis has no impact on the group’s consumers.
During the presentation, Grund said that Richemont’s proposed sale of a majority stake in YNAP to Farfetch and Alabbar is pending antitrust approval, which is expected to take up to a year. The initial phase of the transaction is expected to close by the end of the calendar year 2023.
As reported, Farfetch and Alabbar have agreed to acquire 47.5% and 3.2% of YNAP respectively, leaving Richemont in possession of 49.3%. Rupert reiterated that the deal “fulfills my long-standing goal of making YNAP an industry-neutral platform with no controlling shareholder.”
In return, Richemont will receive Farfetch shares, which are expected to represent 12 to 13 percent of Farfetch’s issued share capital. The two partners intend to work together to accelerate the quality and global penetration of Richemont brands online.
The Richemont brands plan to adopt Farfetch technology “to achieve efficiency, flexibility and speed in addressing the needs of our customers, bringing our products to the right place, at the right time, without interruption.” YNAP will adopt Farfetch Platform Solutions to “improve its prospects,” according to Richemont.
In the first half, Richemont recorded a loss of € 2.9 billion from discontinued operations following the € 2.7 billion non-monetary impairment of YNAP’s equity. Ahead of the proposed sale, Richemont has reclassified YNAP as a “discontinued operation” in its books.
In the first half of the year, YNAP recorded sales growth of 11% at effective exchange rates and 4% at constant exchange rates. Richemont said growth was led by Net-a-porter and Mr Porter, with “marked performance” in the UK and the US.
Yoox’s revenues grew at an average figure. Outnet, launched in the United States in May, suffered from reduced product availability and increased competition. In FengMao, the Richemont-based firm with Alibaba in China, revenues grew double-digit high compared to the previous year period.
On Friday, the company also said Patricia Gandji will join the group’s senior executive committee as the chief people officer and CEO of Regions. Gandji will continue to report to the company’s CEO, Lambert.
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