Local investors, still somewhat limited in their ability to buy global shares, have been richly rewarded thanks to their unfettered access to Johann Rupert’s Richemont for the past 30 years. The luxury goods behemoth’s consistent profitability, combined with a weakening rand, has ensured investors have made a mint.
Richemont’s genesis dates to 1988, when Rupert spun out the luxury assets of the old Rembrandt Group (founded by his father, Anton) and listed them as Richemont on the Zurich Stock Exchange and the JSE.
The early Richemont was a curious mix. Besides jewellery brand Cartier, it made two-thirds of its money from the cigarette business Rothmans, and even briefly held a stake in French pay-TV company Canal+.
It was the dependable income from Rothmans that allowed it to buy watchmaker Vacheron Constantin in 1996 and jewellery specialist Van Cleef & Arpels in 1999.
In 2008, Richemont sold the tobacco assets and became a pure luxury brands business. This laid the platform for the Richemont of today — the second-largest luxury group in the world behind LVMH, valued at R980bn.
Like most Rupert-controlled companies, Richemont has a distinct air of balance sheet conservatism. Cash is king and, at last count, the company held cash of €3.4bn (R59bn) — roughly equal to the value of Rupert’s other companies, Remgro and Reinet.
But what sets Richemont apart is its remarkable array of diverse brands.
Jewellery (including Cartier, Van Cleef & Arpels and Buccellati) is the biggest component, along with the watchmaker maisons (such as IWC Schaffhausen, Jaeger-LeCoultre, Panerai and Piaget). But there’s also a sprawling fashion and accessories segment (including Dunhill, Chloé and Montblanc), and online platforms, such as Watchfinder, Net-a-Porter and Yoox.
In short, Richemont is a mix of hard luxury (jewellery and watches) and soft luxury (fashion items such as clothing and handbags). Jewellery shines the brightest, generating 55% of the group’s sales, with another 20% coming from watches.
It sounds impressive — but don’t be fooled into thinking it’s all going like clockwork.
Most of Richemont’s profits come from the jewellery business, largely Cartier and Van Cleef & Arpels — €2.3bn for the year to March, from sales of €7.4bn. And, importantly, profits grew 11%.
But look deeper into the group’s business and there are clear vulnerabilities.
Profits in the watch business, for example, plunged 57% to just €132m in the year to March, as sales fell 21% and margins more than halved to just 5.9%. And the online, fashion and accessories segments were even weaker, clocking up a €464m loss.
Yet despite this, investors love the wider luxury story — as the 76% gain in Richemont’s share price over the past year suggests.
The Covid boost
As the world recovers from Covid, Richemont is doing well, says Nic Norman-Smith of business and tech consultancy LanciaConsult. "The strong growth is not surprising, given the significant transfer of wealth to the ‘haves’ at the expense of the ‘have-nots’ caused by the global lockdowns, which boosted the spending power of luxury goods buyers," he says.
This trend was evident in the three months to June — the first quarter of Richemont’s new financial year — as sales soared 129% to €4.4bn.
SBG Securities analysts call this an impressive performance, which "comfortably exceeded our €4.04bn estimate".
Still, the question is whether Richemont is a good buy for investors after its rally. On this, the jury is very much out.
Norman-Smith believes that, given the risks inherent in the business, the share is not attractive at these levels. (On a p:e of more than 40, it isn’t cheap.)
Peter Little, portfolio manager at Anchor Capital, agrees that Richemont is priced for perfection, even though its margins are "dragging behind other luxury group peers".
Little believes Richemont needs to turn around its fashion and accessories business, quickly find profitable scale for its online platforms and reinforce margins in its watchmaking business to justify such a high price.
"Richemont’s group margin was sitting in the mid-20% [point] pre-2015, and now it’s in the early teens [11.2%]," he says.
"If Richemont can get its margin back to 20% there will be a marked upside in profits. But one could argue that this is already reflected in the market rating."
Looking at the patchy performance, you wonder why Richemont even bothers to trade away from its jewellery sweet spot.
Were jewellery a standalone entity — maybe tagged onto a smaller and more profitable watches segment — it would offer a focused investment proposition, with defendable margins, enviable brands and sufficient cash flows to underpin generous dividends.
But those familiar with Rupert’s thinking might understand Richemont’s strategy better.
History shows that the Rupert family businesses have typically built their portfolios around a single cash-generative asset, which is then used to diversify the portfolio.
This is how it was with Rembrandt (where Rothmans was the linchpin), VenFin (underpinned by Vodacom), and Reinet (tobacco, and now financial services).
Which is a pity, as Richemont’s fashion business is clearly the albatross around the neck of the group.
There are occasional spots of optimism in the company’s fashion arm — for example, its US-based sportswear retailer Peter Millar seems to be on a profit ramp — but the business isn’t nearly as compelling as fashion-strong luxury groups LVMH and Kering.
Even specialist groups such as Nike, PVH (Tommy Hilfiger and Calvin Klein), Luxottica (Ray-Ban and Oakley) and Under Armour are outpacing Richemont on fashion.
It’s not that Richemont isn’t trying. Last month it bought handbag maker Delvaux, and in 2017 leather specialist Serapian joined the fold. Richemont also sold French handbag specialist Lancel and Chinese fashion house Shanghai Tang.
There have been management shake-ups and new products — yet a turnaround remains elusive.
Technology to the rescue?
Fingers crossed, Rupert’s penchant for technology could revive Richemont’s fashion arm.
In Richemont’s annual report, released last week, Rupert points out that online sales in this division grew by "strong double digits" in the year to March, to account for 17% in sales.
"After years of underperformance, we expect the fashion and accessories maisons to benefit from an enhanced ‘route to market’ provided by new digital platforms," Rupert writes.
This isn’t the first time he has bet big on technology.
Remgro was an early investor in Vodacom and Tracker. In VenFin the Ruperts backed fintech business Fundamo, which was later sold to Visa. Even today, Remgro is investing billions in fibre-optic networks.
But for Richemont, the immediate need is for a thriving online platform. It’s a search that began in earnest in 2005, with the purchase of high-end online fashion business Net-a-Porter, which later merged with Italian online fashion retailer Yoox.
The problem is, these online platforms are guzzling money, and there’s no indication when they’ll break even. Even when they do, the margins are unlikely to ever be as good as the 31% profit margin of the jewellery business.
Still, there has been some encouraging progress in recent months. In the three months to June, for example, Richemont’s online sales grew 36% to €216m.
Little believes that in the longer term Richemont’s plan to create a "peer group platform" for all luxury goods companies to sell their products could make sense. It would give them valuable client data, illustrate consumer trends and help monitor stock levels.
Though other luxury companies might initially be reluctant to get on board, if the platform becomes the default option for online shoppers, rivals will have to either join or invest heavily in building their own platforms.
Nonetheless, Little offers a word of caution: "Richemont does need to future-proof its business. But the online thrust is mainly around soft luxury, which is not its strength."
There’s also the issue of perception.
Keith McLachlan, investment officer at Integral Asset Management, says online ventures in the luxury market might be seen as cheapening the buyer’s experience.
"Typically, shoppers of luxury goods want the in-store experience — the glass of champagne while they browse," he says. "But not having a foot in the online market would be negligent. So the trick is to translate that in-store experience into an online experience. Fortunately, Richemont has a bulletproof balance sheet to help build up this channel and even become dominant."
The quest for an online model
In the annual report, Rupert says there’s been a higher demand for more choice, newness and "see now, buy now" options, accelerated by digital users.
But, he says, "clients also want a more personalised touch, styling advice, curation and access to the voices behind the brand, far from the catalogue approach offered by some platforms".
This means Richemont’s platforms, Net-a-Porter and Yoox, have to change their models.
Rupert says Net-a-Porter, which has been a leader in "digital distribution" for the past 20 years thanks to a partnership with more than 1,000 luxury brands, is now evolving "towards a model that combines curated inventory ownership and e-concessions with top brands".
Yoox will also expand its 14,000 brands to include more choice and new products. "The technology supporting this … is gradually converging towards a ‘Luxury New Retail platform’ model for hard and soft luxury."
In this new online world, China plays a pivotal role. To this end, Richemont has invested $300m in a partnership with online retailers Alibaba and Farfetch to improve access to markets in China through the Luxury New Retail initiative. Richemont will take a 12.5% stake in this venture.
Rupert says he is "confident that the investment was worth it, and it will become more apparent to everyone over the next two to three years".
This, he says, is the future model for luxury retail.
Rupert suspects that, in future, the environment will "be a lot more digital, and it will be a lot more focused on individual consumers as we learn more and more and more through our data management".
In the past, if Richemont sold 800,000 watches, hypothetically, the group got data on only 15% of those clients. "We then introduced an eight-year warranty … but the clients had to register. Suddenly, our [data] capturing [went] up multifold. So now we can communicate [with clients] directly."
Rupert is betting that technology will be the X-factor to transform the luxury industry, and he’s hoping that by moving early, Richemont can steal a march on rivals.
If he’s right, that 76% gain in Richemont’s stock over the past year will be just the start of something phenomenal.
For Richemont the immediate need is for a thriving online platform
— What it means:
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