Richemont shares slip on economic woes and currency volatility

The capex was spent primarily on renovations and extension of the internal store network as well as expansion or acquisition of manufacturing facilities in Switzerland and Italy. File image.

The capex was spent primarily on renovations and extension of the internal store network as well as expansion or acquisition of manufacturing facilities in Switzerland and Italy. File image.

Published Nov 13, 2023

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Richemont shares tumbled 5.5% on Friday after the Cartier owner reported a 2% slow-down in operating profit from continuing operations for the half year to end September, a period in which the company faced “uncertain macroeconomic and political environment” and “adverse foreign currency movements” in some of its major markets.

Operating profit at €2.7 billion (about R54.1bn) for the six months was 2% lower compared to the year earlier, on an actual exchange rate basis, although this was 15% firmer on constant exchange rate basis.

Stronger sales and gross profit that was up by 5% for the period, coupled with controlled operating expenses, was not enough to stem the slide in operating profit at actual exchange rates for the company.

Against the backdrop of stronger capital expenditure of €378m, which was 3.3% firmer over the previous comparative period, Richemont also made further investments into technology, although the group’s online retail sector was lower by 2%, with subdued growth in Jewellery and fashion and accessories segments.

Nonetheless, the capex was spent primarily on renovations and extension of the internal store network as well as expansion or acquisition of manufacturing facilities in Switzerland and Italy.

Free cash flows were 58% stronger at €866m on the prior year period. However, this firmer cash generation was partly offset by increased net acquisition of non-current assets and higher lease payments.

Shares in Richemont on the JSE traded 5% lower at R2 209.99 on Friday as investor sentiment about the outlook of the luxury segment tapered off after the company’s depressed earnings The shares are however 4.25% firmer in the year to date comparative.

Chairman Johan Rupert said although “demand for iconic collections remained resilient,” the Specialist Watchmakers recorded a 3% year-on-year sales decline to €2 billion.

“This performance overshadowed the high single-digit sales growth in directly operated stores, now 57% of the Specialist Watchmakers’ sales, and the continued outperformance of A. Lange & Söhne and Vacheron Constantin,” he said.

In July, Richemont signed an agreement to acquire a controlling stake in Gianvito Rossi, the renowned Italian luxury shoemaker, with the deal expected to be completed next year. Rupert said the company’s ‘Made in Italy’ craftsmanship and untapped potential was geared to strengthen Richemont’s fashion and accessories portfolio.

After seeing growth ease in the quarter to September on account of inflationary pressures, slowing economic growth and geopolitical tensions impacting consumer sentiment, Richemont said it has started to see broad-based normalisation of market growth expectations across the industry.

“The positive news is that a soft-landing scenario seems to be prevailing in major economies with still higher growth expected from China, which should benefit from stimulus measures. Financial discipline has been maintained enabling targeted investments and a further strengthening of our operation,” said Rupert.

During the period, Richemont operating expenses grew by 9% over the prior-year period. Selling and distribution expenses also paced up 9%, amounting to 23.4% of sales compared to 22.8% a year ago.

This reflected higher retail sales, larger retail operations in addition to inflation-driven operating cost increases. Communication expenses quickened by a similar 9% as the company went all out to support sales, most notably in the jewellery category, to represent 8.6% of sales and slightly above the 8.3% for the year earlier.

“Increased salary costs, investments in technology and the strength of the Swiss franc compared to the euro contributed to the 16% increase in administrative expenses, which are primarily incurred in Swiss francs.”

Analysts said on Friday that the financial performance by Richemont in its first half year was “further evidence of weakening affluent luxury” sales.

BUSINESS REPORT