Luxury watches supply glut affects global market

THERE are too many luxury watches in the world. That was the assessment from Richemont Chairman Johann Rupert.

Rupert said yesterday his company is supplying thirdparty retailers with fewer models than they’re selling, so the number of its watches out in the market is shrinking. He thinks some rivals are happy to flood the market with their wares, and that’s a problem for the nascent watch recovery that investors are betting on.

Richemont’s approach shows a continuation of the disciplined stance it took during the latest luxury downturn, buying back excess stock and cutting about 300 Swiss staff to curb costs.

But full- year sales were lower than expected, in contrast to some of the forecast- busting performances announced by other high-end powerhouses over the past few weeks. And fourth- quarter sales growth was just in line with that of the previous three months, rather than the step up that had been anticipated, prompting the biggest fall in the shares for 11 months.

His evaluation is more evidence that expectations of a revival in demand of all manner of top-range products, from watches to handbags, have got ahead of reality. While there’s no doubt that bling is back – just look at the sales growth at LVMH and Kering – they were struck against easy comparisons, and there is no guarantee that luxury demand will continue to go gang-busters for the rest of the year, when comparisons get tougher. An M&A boom or a sharp acceleration in demand is needed to justify prices that are close to their peak.

There were some more positive aspects to Richemont’s fullyear results. Its operating profit of 1.8 billion (R26.35bn) was better than expected – though that’s down 14% from the year earlier, it’s still a decent performance given the slump in the luxury market last year.

But even with yesterday’s fall, shares in Richemont are up about 45% since mid-September, when the group warned of a slump in full-year net income. The shares trade on a forward price earnings ratio of 25 times, just ahead of Swatch Group AG and a significant premium to the Bloomberg Intelligence luxury peer group.

Part of that rating is down to the decline in the watchmakers’ earnings over the past year. But it also reflects hopes that the watch market has finally turned a corner.

Indeed, Swiss watch exports increased for the first time in 21 months in March. – Bloomberg