BEHIND RICHEMONT’S SLIDE
The company is holding on to cash but also investing to support longer-term growth
The market rating on luxury brands conglomerate Richemont might not be excessively rich, but immediate prospects are poor enough to distract investors from the company’s efforts to craft a stable longterm growth platform.
Richemont, which remains one of most popular rand hedge stocks on the JSE, is trading close to a 12-month low and nearly 30% down on its annual high of R120, seen in November last year. The market thinks the R180bn/year business has reached a rather treacherous point.
Richemont has, over the decades, proved to be an enduring business with a well fortified balance sheet, dependable cash flows, enormous brand strength, conservative management and a progressive dividend policy. But right now the company is struggling with the conditions; its sales turned negative in the second half of the financial year to end March.
The bumpier global economic landscape has become even more difficult to traverse with geopolitical unrest and terrorist attacks weighing on client sentiment.
To make matters worse, currency movements — which initially buoyed Richemont (thanks to a softer euro and markedly weaker yen) — turned negative, making for highly volatile tourism patterns.
Richemont’s 10% increase in sales in the year to end March was made up of a very strong first half (up 24%) and a weak second half (down 5%).
CEO Richard Lepeu says that until the Paris and Brussels terrorist attacks, sales had been supported by increased tourism, driven by a weak euro. “Thereafter, a deteriorated feel-good factor and safety concerns deterred tourists (especially from Asia) from visiting Europe.”
The bottom line is that Richemont’s operating margin was eroded to 19.5% from 23.4% in the previous financial year with comparable operating profit coming in 11% lower at €2.16bn.
Certainly the (very) limited guidance emanating from Richemont’s investment presentation last month is not going to inspire investors to rush in and buy stock.
Richemont CFO Gary Saage indicates that April sales declined by 15% on a constant rate basis and by 18% on a reported basis.
All regions reported sales declines, but at constant exchange rates the Middle East and Africa posted growth.
Saage says the performance was largely anticipated. But it is