Johann Rupert Defiant on Richemont Strategy Despite Falling Shares
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LONDON — A shrinking share price, fear of stagflation and uncertainty about China’s medium-term future haven’t undermined Johann Rupert’s underlying optimism about Compagnie Financière Richemont, or the future of hard luxury.
The only thing he isn’t upbeat about — at least for now — is China. In his view, the road back from lockdowns there is not going to be quick.
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Despite the difficulties that Richemont and its peers could face in the current fiscal year, Rupert knows that business could be much worse. He’s grateful that his products are seasonless and nonperishable. He’s satisfied with the long waiting lists for Richemont’s watches and jewelry; and he knows the company has a net cash cushion of 5.25 billion euros.
Rupert doesn’t even appear to be that annoyed by the ongoing delay in sealing the proposed deal between Yoox Net-a-porter and Farfetch, which Richemont disclosed last November.
“Our sales have exploded and our costs are under control. I’m happy — and I’m not often happy. Just don’t tell me to give you the future. I have no idea,” Rupert told analysts on Friday after Richemont posted strong, double-digit sales and profit gains across all product categories and geographic regions.
The luxury giant, parent of Cartier, Panerai and Chloé, saw a 46 percent surge in revenue to 19.18 billion euros, while operating profit more than doubled to 3.39 billion euros in the fiscal year ended March 31.
Profit after tax was up 61 percent to 2.08 billion euros, while the company’s net cash position, at 5.25 billion euros, was 55 percent higher than the previous year.
The Americas region, where sales climbed 79 percent, fueled much of the sales growth. Richemont said the region now stands almost on par with Europe as the group’s third-largest region in terms of sales.
Asia-Pacific, the largest region, saw sales rise 32 percent in the period.
Richemont’s specialist watchmaker division, which includes A. Lange & Söhne, IWC, Jaeger-LeCoultre and Panerai, was the fastest-growing category with sales climbing 53 percent in the 12 months to March 31.
Asked about overall sales trends in the U.S., Rupert said demand is “not just on the two coasts. Have you ever been to Midland, Texas, where they eat pan-fried steaks? Well, they buy watches there as well,” he said.
Cyrille Vigneron, president and chief executive officer of Cartier, said the brand has been performing strongly in the U.S. across jewelry, watches — and every other category. Demand, he said, “has been very solid for the past year.”
Although Rupert was not prepared to project into the future, he believes that China will be slow to recover once lockdown lifts.
“Please don’t assume that China will reopen, and that there will be a boom. I suspect that even when China comes out of isolation, the bounce back would not be as quick, or as immediate, as we’ve seen in Europe, the United States and, most recently, Japan.
“I think the Chinese economy may suffer for longer than people think, and I think there are going to be major corporations that will be laying off people. The mood will cool down. People will be rational and slightly more cautious than they were two or three years ago,” Rupert said.
Currently about 40 percent of Richemont’s retail network in the country is shut, while clients and staff alike are stuck at home. Rupert said there is no excess stock in China and, of late, Richemont has been diverting inventory shipments to Japan.
He added that once the lockdowns lift, China’s bit of the supply chain will take “a year or so to unclog,” said Rupert. “And while we’re not seeing any danger signs of flashes or drops, don’t start projecting 30 to 40 percent growth per annum — for anybody,” he warned analysts.
Rupert said another reason that he’s happy is because Richemont is already prepared for a period “when growth won’t be 30 percent.”
His arguments offered little comfort to investors: Richemont’s share price fell throughout the day, and closed down 13 percent at 91.76 Swiss francs.
Analysts, and the markets, were concerned about the lack of an update on the Farfetch deal, and Richemont’s earnings before interest and tax margin for the year, which was 11 percent below consensus expectations.
The decline was due chiefly to higher communication costs in the period stemming from a return to live events post-COVID-19, and to Richemont’s freeze on activities in Russia. Pulling out of Russia cost the company 168 million euros between operating expenses and inventory.
Rupert told analysts to relax about EBIT, and Richemont’s status in Russia, where it is still paying employees despite not doing any business. He said he was surprised by the share price reaction.
“We have operating leverage — trust me — and in Russia we didn’t have to write everything off, but we did. It was a conservative position that we took,” said Rupert, adding that the markets shouldn’t fixate on the Russia costs.
He said those costs should be seen more like a foreign exchange “blip” on the balance sheet.
Richemont did not update on its talks to merge its Yoox Net-a-porter platform with Farfetch. The Swiss-based luxury giant said discussion with its “Luxury New Retail partners continues around closer future collaboration.”
The deal, Richemont added, involves “considerable complexity, which means the process is inevitably protracted.” The company said it is looking forward to concluding matters in the “near future.”
Last November Richemont confirmed it was in late-stage discussions with Farfetch about creating an open and shared platform with YNAP to sell fashion, luxury and high-end jewelry.
If it comes to be, the site will have a broad shareholder base and no majority owner. It will leverage the tech firepower of Farfetch and see brands including Cartier and Van Cleef & Arpels — in addition to myriad fashion names — join a new iteration of the Farfetch marketplace.
At the time Rupert said other industry players were ready and waiting to put their cash on the table, invest in the new platform, and start selling their brands on it, too.
On Friday, Rupert suggested that the deal was ready to complete, but that the M&A people — on both sides — were delaying the process.
“We’re pretty close to where we want to be. We all agree that we’ve got to do it, so let’s do it. We are not in a position where there is a disagreement between principals. There is a buy-in from all of our maisons. There’s been tremendous progress,” he said.
Richemont also noted that the online companies YNAP and Watchfinder saw their earnings before interest, taxes, depreciation and amortization and operating losses decrease in fiscal 2022.
Notwithstanding Brexit-related one-off expenses, YNAP’s EBITDA reached breakeven before the exceptional reward payments to group employees, and the “negative contribution” of Feng Mao, the Chinese joint venture with Alibaba.
Rupert said that even though the JV with Alibaba was a drag on EBITDA in 2022, it was an invaluable investment for Richemont.
“We are building another route to market, an infrastructure, a pipeline, a fiber optic network. We are doing the spadework for online as a route to market, so I don’t look at [the JV] as an operating loss. I look at it as an investment,” Rupert said.
The JV was formed to bring the retail offerings of Yoox Net-a-porter to Chinese consumers and enable Richemont to become a “significant and sustainable” online player in the market, according to Rupert.
As part of the deal, Net-a-porter and Mr Porter have opened online stores on Alibaba’s Tmall Luxury Pavilion.
In 2020, Richemont and Alibaba strengthened their relationship, striking a deal with Farfetch that saw both parties pour hundreds of millions of dollars into Farfetch Ltd., and into a joint venture called Farfetch China.
While Rupert may feel secure about his own company’s prospects going forward, he’s concerned about macro challenges, including stagflation, which he said he remembers well from living in New York in the ’70s.
“There’s very little you can do when it hits,” he said, reiterating his stance that central banks had pursued an “irresponsible” quantitative easing strategy over the past 14 years, flooding economies with cash. He said that when QE ends, “somebody’s got to take the pain sooner or later.”
With regard to Richemont’s own pricing, he said the group does not hike prices to increase profits. The company said it raised prices in May of last year by a single digit to offset the rising price of gold.
Rupert said Richemont continues to invest in manufacturing, retail and people as part of his wider vision to build brand equity and remain loyal to his customers.
He said contrary to what some people may think, he eyeballs every single design that Richemont markets and sells. He said the company’s great challenge continues to be “making products for three to four years in the future, looking at the pipeline and betting that our taste will be in demand.”
Rupert added that Richemont will always walk the line between attracting new customers, “being democratic” — and limiting supplies. He takes great pride in how Richemont’s watchmakers are trained and how long it takes them to produce a watch.
“We have very good clients on waiting lists because we have limited production and we refuse to [compromise] on quality,” he said, adding that at A. Lange & Söhne it takes nearly 20 years to train the watchmakers.
Rupert’s great satisfaction, aside from creating and marketing designs that chime with customers, is supporting artisans through the Michelangelo Foundation for Creativity and Craftsmanship.
Michelangelo is a private, international, nonprofit foundation that Rupert cofounded to preserve, encourage and promote fine craftsmanship.
Rupert believes that artisans are the future of luxury goods, and that Europe’s artisans must be supported and nurtured, or they will disappear.
“We have built our businesses on these artisans and craftsmen, and they are a dying breed,” said Rupert, adding that in the next two or three years he wants to start “building bridges,” connecting them directly with clients and creating more jobs.
The foundation stages the annual Homo Faber exhibitions in Venice, championing artisanal talent by showcasing a variety of materials, techniques and skills through live demonstrations, immersive experiences and handcrafted creations.
This year’s show took place at the Fondazione Giorgio Cini on the island of San Giorgio Maggiore and celebrated European and Japanese talents.
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