Working Your Cartier Assets Deserves Respect
(Bloomberg) -- A rising luxury tide hasn't lifted all bling boats.
While other megabrands have announced blockbuster results, Cie Financier Richemont SA's first half operating profit was below analysts' expectations, sending the shares down as much as 8 percent.
Hard luxury — watches and jewelry — has been slower to recover than fashion and leather goods. What's more, even though watch sales are now starting to tick up, particularly in Asia, the aftershocks of the years when Chinese consumers stayed away from the market are still being felt.
Richemont's operating profit was held back after it spent 203 million euros ($239.6 million) buying back unsold models in Asia and Europe in order to reduce supply in the market. That's a high number, given that this tidying has been going on for some time now.
Compared with the recent great performance at soft luxury groups, such as LVMH, Kering and Hermes International, Richemont's report might well look disappointing. But that would be shortsighted — as is the share price reaction.
The company should be applauded for continuing to clean up stock. That leaves it well positioned when hard luxury catches up with handbags. The retail performance was strong, an indication that trends are going in the right direction.
What's more, Richemont is taking steps to reduce its reliance on third-party watch retailers, and increase direct sales to consumers. Analysts at Morgan Stanley note that across the industry, about 90 percent of Swiss watch sales by value are still through wholesalers. Selling direct to customers has the potential to increase margins. Richemont is well placed here, particularly with the company taking full control of Yoox Net-A-Porter SpA.
The group is innovating in other ways too, targeting millennials, who are becoming increasingly important to the top end. The relaunch of Cartier's Panthere model builds on the appeal of its iconic Love bracelet. The group has also introduced Baume, an affordable line of watches using recycled materials.
There are opportunities elsewhere, perhaps in the expanding market for pre-owned watches. If Richemont did decide to move into this market, it could draw on the online prowess of YNAP, and its specialist watch makers who could authenticate second-hand models.
Shares in Richemont are up 15 percent over the past year, underperforming both Swatch and the Bloomberg Intelligence luxury peer group. They trade on a forward price earnings ratio of about 22 times, a discount to Swatch's 24 times.
That looks harsh. The company has plenty of financial firepower — it had net cash of 5.3 billion euros as of March 31. Cash flow increased by 827 million euros in the year, while inventories fell by 360 million euros. It also recently raised 4 billion euros in its first bond issue.
This gives it the scope to invest in YNAP and take advantage of other opportunities, for example in leather goods. Analysts at Exane BNP Paribas have even suggested a merger with Kering SA. And the disposal of some soft luxury divisions can't be ruled out either.
This timepiece has lost a little of its luster. That doesn't mean it should be consigned to the bottom of the jewelry box.
©2018 Bloomberg L.P.