U.S. Growth Slowing After ‘Reckless’ Rate Rises, Says Richemont Chair Johann Rupert
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LONDON — Compagnie Financière Richemont may have beaten market projections for fiscal 2023, but company chairman Johann Rupert is looking past those double-digit gains to a volatile year ahead.
Rupert described the frequent, rapid-fire interest rate rises in the U.S. as “reckless,” and said their impact has been exacerbated by all of the cash and easy credit available until recently. Over the past 12 months the Federal Reserve has raised rates at the fastest pace in 40 years.
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As a result of the new, tighter restrictions on credit, “the United States will not be as buoyant as a year ago, and I actually think we are in for a harder landing than we’d hoped for. And it will affect everybody,” said Rupert, who suspects the U.S. slowdown began in November 2022.
Despite the continued turmoil, Rupert said Richemont was well-positioned because of its wide geographic spread. “We fly on five engines, and if one engine has a misfire, we have four more. So, as the U.S. slows down, China is picking up,” he said.
Rupert spoke after the group reported that in the 12 months to March 31, it saw a 19 percent upswing in sales to nearly 20 billion euros, and a 60 percent surge in profits from continuing operations to 3.91 billion euros.
The numbers beat analysts’ projections, and the gains were broad-based, covering all geographies and product categories.
At actual exchange rates, sales in Europe rose 30 percent, followed by the Americas with 27 percent, and the Middle East and Africa with 24 percent. In Japan, sales jumped 45 percent, with demand so strong that Richemont had to redirect extra stock to the region.
Asia-Pacific rose 6 percent as the Greater China region emerged from lockdown, and demand is picking up.
“The Chinese saved an enormous amount of money during lockdown, which had been a traumatic experience for the country. People’s first expenditure after lockdown was lifted was to dine, to travel — and now it’s rising further.
“It’s not like it was the U.S. when lockdown lifted. The Chinese are a little bit more cautious — they have not gone and crashed their credit cards. Their behavior has been more sober,” said Rupert.
He noted that wealthy individuals and families — rather than big tour groups — are the ones doing the spending right now in China. Looking at the data, Rupert said that Richemont is not expecting the tour groups to return until later this year.
He said that China will always be an important market for Richemont. “It’s a highly sophisticated, highly industrial market. We’ve got to remember they’ve had 4,000 years of civilization when our forefathers were living in caves. And yes, we believe it’s going to grow” in the long term.
He also believes China’s latest, post-COVID-19 rebound will gain steam and power Richemont’s sales over the next 12 months as the U.S. market slows down.
Barclays estimates that Greater China rose by around 35 percent in the first quarter of the current fiscal year, and that Richemont should see easy comparatives in the second quarter as well.
“Looking beyond [the second quarter], the group also seems optimistic about being able to capture Chinese tourists when they resume their spending abroad,” Barclays said.
Although Richemont’s 2023 sales and EBIT, or earnings before interest and taxes, beat expectations, the reported profit for the year declined 86 percent to 301 million euros. The decline was due to a non-cash charge of 3.4 billion euros linked to the planned transfer of Yoox Net-a-porter Group to Farfetch.
RBC Capital Markets noted that the overall 3.6 billion euro loss from the discontinued operations of YNAP was worse than consensus expectations of 2.97 billion euros.
As reported, the agreement will see Farfetch and Alabbar acquire 47.5 percent and 3.2 percent, respectively, of YNAP. The deal will leave Richemont with a 49.3 percent holding in the online group and 12 to 13 percent of Farfetch’s issued share capital.
The initial stage of the transaction is expected to be completed by the end of 2023. The deal also foresees Richemont’s brands adopting Farfetch’s distribution and data technology.
Richemont’s product categories also saw robust growth in the 12-month period.
Jewelry grew by 20 percent and specialist watchmakers by 18 percent. The other brands division, which includes Fashion & Accessories, grew by 34 percent.
During the period, Richemont said there was great appetite for long-standing, classic collections such as Panthère and Santos at Cartier, and Alhambra at Van Cleef & Arpels, which outperformed in the period.
Demand is so great that Cartier is increasing its manufacturing capacity in northern Italy and France, and Richemont is investing in training more aspiring jewelry- and watch-makers.
Watch companies witnessed a similar trend in the 12-month period, with classics such as the Baume & Mercier Riviera and the IWC Pilot watches outperforming in the 12 months. Vacheron Constantin, meanwhile, reached 1 billion euros in sales.
Sales in directly operated stores continued to outperform other distribution channels, and their contribution to group sales rose to 68 percent.
Rupert said there was a “sharp growth” in sales and profitability at the Fashion & Accessories brands, which was driven by “renewed creativity” at the Richemont maisons and by higher travel retail footfall.
Montblanc, Chloé and Peter Millar, including its G/FORE footwear business, were among the top performers. Overall, the “other” business area returned to profit with the Fashion & Accessories Maisons delivering 94 million euros in operating profit.
Richemont also noted that Watchfinder sales were negatively impacted by lower demand from U.K. domestic clientele and a “subdued” pre-owned watch market. Watchfinder has quite a few competitors in the U.K., including the auction houses, where the prices of high-end watches have been spiralling.
Rupert reiterated that he has no plans to sell Richemont or Cartier, and that he has never received a direct approach from Bernard Arnault, founder, chairman and CEO of LVMH Moët Hennessy Louis Vuitton, contrary to media reports.
“I meet a lot of the other luxury goods chairmen, CEOs and owners regularly, and everybody always looks at opportunities, but there has been no direct approach by Mr. Arnault,” said Rupert.
He also addressed market chatter about a potential tie-up with Kering: “Everybody urged us to do that a year ago, and two years ago. And we said no,” Rupert said.
Regarding any future acquisitions, Rupert said he’d much rather focus on his current portfolio of companies than get tangled up with buying another one — and having to restructure it.
“Why do we want to do that? We know what we have, and we were fortunate in buying Delvaux and Buccellati. We’d rather concentrate on those companies and emulate the success that we’ve had with Cartier, with Van Cleef & Arpels and with Vacheron,” said Rupert.
He added that he’d much rather “democratize” the offering of a brand such as Buccellati than buy a jeweler with lower price points and spiff it up.
Rupert also discussed the importance to Richemont of preserving the “equity and desirability” of the brands. He said the advertising scandals that recently engulfed Balenciaga and Bud Lite “would have never occurred at Richemont. We want to stay true to our culture, to grow and to preserve brand equity.”
He said that Richemont takes pains to remain “on-code” with all of its products and said that clients can sniff inauthenticity a mile away. “The strongest protection for any brand is to stick to its DNA and its codes,” he said.
In a separate statement, Richemont said it has nominated Fiona Druckenmiller for election to the board of directors. Her appointment as a non-executive director is subject to the approval of shareholders at the 2023 AGM set for Sept. 6.
Druckenmiller is the founder of FD Gallery, a New York-based boutique that offers pre-owned luxury items, predominantly vintage and contemporary jewelry.
She has nearly a decade of experience in the finance industry, and cofounded the Druckenmiller Foundation with her husband in 1993 to support medical research, education, the alleviation of poverty, and various environmental causes.
She also sits on the board of trustees of New York University and the NYU Langone Medical Center and is the vice chair of the board of the American Museum of Natural History.
In a further statement, Richemont said it plans to buy back up to 10 million ‘A’ shares, representing 1.7 percent of the capital and 1 percent of the voting rights of the company.
Richemont said the shares will be held in treasury to hedge awards to executives and employees under the group’s long-term incentive plan. The initiation of the buyback program is subject to the authorization of the Swiss Takeover Board.
Shares in Richemont closed up 3.5 percent at 154.7 Swiss francs on Friday.
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