Richemont Slumps as Watch Inventory Buybacks Dent Earnings

(Bloomberg) -- Richemont shares fell the most in three years as the Swiss luxury-goods maker bought back more unsold watches from retailers, weighing on profit growth.

The stock fell as much as 8.2 percent. Richemont spent 203 million euros ($240 million) on inventory repurchases aimed at preventing watches from falling into the hands of unauthorized sellers, the Geneva-based company said Friday. That held back full-year operating profit, which rose 5 percent, less than analysts expected.

“Another really messy set of results following a larger-than-expected round of watch inventory buybacks,” Zuzanna Pusz, an analyst at Berenberg, wrote in a note. She said the market had expected 125 million euros, as the watch industry has shown several months of recovery from a long slump.

The maker of Cartier and IWC Schaffhausen timepieces has also been closing underperforming stores and cutting middlemen out of its distribution network. After a multiyear slowdown, the company’s watch offerings now include models at prices Richemont previously avoided, such as the $560 Baume watch unveiled this week. Chief Financial Officer Burkhart Grund signaled the buybacks are ending as he said the company is now happy with the level of inventory held in the market.

The repurchases follow a previous round that cut into earnings two years ago, when Cartier reduced stock among distributors. Unsold watches pose a risk for luxury-goods makers, as they often enter the so-called “grey market” of unauthorized resellers, who offer discounts and erode pricing power. Richemont’s profit increase would have been 10 percent excluding the buybacks.

“It’s the underlying brands that are not performing well enough and this includes Cartier watches, in our view,” said John Guy, an analyst at MainFirst Bank AG. “Jewelry remains the more resilient player.”

Richemont also said Eric Vallat will become head of fashion and accessories brands, which is a new role reporting to Chief Operating Officer Jerome Lambert. Vallat has been chief executive officer of Remy Martin since 2014.

Richemont just finalized its 2.7 billion-euro purchase of Yoox Net-a-Porter SpA as the company revamps its online strategy. YNAP named Olivier Schaeffer, who comes from LVMH’s cosmetics retailer Sephora, as chief operating officer, last week.

The company raised 4 billion euros in its first bond sale ever to help boost its finances as it also bought a stake in travel retailer Dufry AG last year. Chairman Johann Rupert said that while Richemont is “well-positioned” with its portfolio, further acquisitions and disposals are possible.

“Our long-term approach does not preclude us from targeting strategic investments and divestments, as we have demonstrated over the past year,” he said in the statement.

CFO Grund said the company is focused on finalizing its purchase of YNAP, aiming to buy the remaining 5 percent of the company traded on the market in coming weeks. It’s also still in talks to sell ailing pursemaker Lancel to Italy’s Piquadro SpA. Richemont announced those negotiations two months ago. In 2017, Richemont sold Shanghai Tang, a Hong Kong-based dressmaker.

“We look at opportunities in this way on a maison-by-maison level,” Grund said. “Obviously I couldn’t give you any details of other impending transactions.”

Jewelry had double-digit sales growth in most regions, surpassing watches to become Richemont’s product line.

The company also sees room to expand in leather goods at brands such as Cartier, he said.

“We have scaled up our capabilities in Italy,” he said. “We have a meaningful opportunity to grow our business in leather goods, first and foremost organically.”

©2018 Bloomberg L.P.