Richemont Shares Dive Despite Robust Q1 Growth in China, Asia Pacific

LONDON — Compagnie Financière Richemont may be reaping the benefits of a rebound in China, but those gains have been hard-won — and will only get harder.

In the first fiscal quarter, Richemont saw sales surge 14 percent at reported rates and 19 percent at constant exchange to 5.32 billion euros. Those gains were fueled by a strong rebound among Chinese tourists and locals, who have been splashing out cash and enjoying themselves after years of lockdown restrictions.

Investors weren’t impressed with Richemont numbers. Shares fell 8 percent to 141.55 Swiss francs in morning trading on Monday, and closed down 9.9 percent at 138.65 Swiss francs.

Richemont knocked other luxury stocks during the day, with LVMH Moët Hennessy Louis Vuitton closing down 3.7 percent and Kering falling 2.5 percent. Moncler dipped 2.9 percent while Brunello Cucinelli was one of luxury’s biggest decliners, tumbling 4.2 percent at the close of trading.

In the three months to June 30, sales in mainland China grew in the double digits, while those in tourist hotspots Hong Kong and Macao saw triple-digit increases due in part to favorable comparatives with the corresponding period last year.  

Sales in Japan made a surprise 14 percent jump, while Australia and Taiwan also delivered robust results, driven in part by the jet-setting Chinese.

At constant exchange rates, the Asia-Pacific region was up 40 percent in the quarter — and those gains didn’t happen by accident.

According to Bain & Co., the top 2 percent of customers account for around 40 percent of luxury sales, with the trend more pronounced in the China market.

So Richemont, like competitors LVMH Moët Hennessy Louis Vuitton and Kering, zoomed straight to China as soon as pandemic restrictions lifted and began courting those precious high-end customers in person, staging special trunk shows and events that make them feel like rock stars.

Over the past few months Cartier, Richemont’s single biggest brand, has been hosting major exhibitions in Hong Kong and Guangzhou to educate new audiences about the company, and simultaneously sell big-ticket items to affluent customers eager to get back on the social calendar.

Despite those efforts, Richemont’s sales in the Asia Pacific region slightly missed Royal Bank of Canada’s expectations. The bank had projected growth of 41 percent in the region, and Richemont delivered 40 percent.

In addition, Richemont’s overall sales rise in the quarter, 19 percent at constant exchange, missed Bernstein’s and Barclays’ estimates of 20 percent.

In the coming months, Richemont and other luxury groups might have to work extra hard to keep Chinese customers — even the super-rich ones — on-side.

According to a recent Barclays report, big spenders will be the main driver of luxury sales growth in China as the expanding middle class begins to economize due to challenging economic outlooks.

But relying on a single cohort is not necessarily a sustainable business model, while luxury goods companies ignore the middle classes at their peril.

On Monday, just as Richemont was releasing its Q1 results, China reported that second-quarter GDP rose 6.3 percent year-over-year, missing analysts’ estimate of 7.3 percent, according to a Reuters poll of economists.

Growth was 0.8 percent compared with the previous quarter, and slower than the 2.2 percent quarterly growth rate seen in the first three months of the year.

“Households are wary of spending, consumers remain skeptical about the recovery, and expectations relating to employment and income gains have turned negative,” Moody’s Analytics wrote in a research note following the GDP announcement.

While the consumers impacted right now are not necessarily buying diamond earrings or high-end watches, the overall mood is shifting. The country as a whole might be inclined to save rather than spend, and pull back on travel abroad in the coming months.

Indeed, they may start behaving like Americans, who have already pressed “pause” on spending.     

In the first quarter Richemont saw the Americas region contract by 2 percent at constant rates due to lower wholesale sales. The company said retail sales were broadly flat against the prior-year period.

Richemont wasn’t alone this month in seeing sales in the Americas region shrink.

Last Friday, in its first-quarter trading update, Burberry said that sales in the U.S. declined by 8 percent as aspirational shoppers snapped their wallets shut amid rising interest rates and a cost-of-living crisis. In the previous quarter, sales in the Americas region declined by 7 percent. 

Burberry noted that high-net-worth shoppers in the U.S. picked up some of the slack with their purchases of big-ticket leather goods and outerwear, but it was not enough to offset the decline in the quarter.

By category, Richemont’s jewelry division was, as usual, the top performer, with Cartier, Van Cleef & Arpels and Buccellati growing 24 percent in the quarter. The watch division rose by 10 percent.

Analysts at RBC attributed the growth in jewelry to a “stronger and more commercial product lineup at Cartier with better execution, ongoing Van Cleef strength and longer-term growth prospects for Buccellati.”

The company’s “other brands” division, which includes Watchfinder, Peter Millar, Chloé, Delvaux and Dunhill, rose by 6 percent at constant exchange rates.

Specifically, sales at the fashion and accessories maisons grew by 8 percent on “demanding comparatives,” due to strong retail sales across all the maisons and almost all regions, including in the Americas.

Luxury golf and sports brand Peter Millar delivered double-digit sales growth despite the relative slowdown of the U.S. market and high comparatives.

Richemont said that Montblanc is starting to benefit from “an evolving product offering” and a revival in the travel retail channel. It added that Chloé is progressing well as it focuses increasingly on retail while Alaïa, Delvaux and Dunhill also posted strong contributions.

Richemont noted that retail sales accounted for 68 percent of group sales in the three-month period, and online retail sales were 2 percent higher. 

By contrast, Yoox Net-a-porter saw sales shrink by 8 percent at reported rates and 10 percent at actual ones.

Richemont, which counts YNAP as a discontinued operation following a proposed deal to sell a majority to Farfetch and Alabbar, said the decline was due to a “globally challenging environment” for digital distribution pure players.

Richemont’s net cash position as of June 30 was 6.6 billion euros, compared with 5.4 billion euros in the corresponding period last year.

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