Luxury brands conglomerate Richemont has finished its financial year in far finer fettle than investors might have imagined six months ago.
So much so that its shares have finally punched through a five-year trading range, in which it seemed the stock was perpetually stuck, setting a record high of R159.77 a share.
Its 7% rise in the past week takes its gains for the year to about 20% at the time of writing. Major investment banks, Deutsche and Societe Generale, have both upgraded it to "buy".
Richemont’s renewed allure may also be due to chair Johann Rupert’s revelations that Gucci owner Kering has been sniffing around.
Presenting the company’s results last week, Rupert disclosed that Kering had proposed a merger "more than a year ago".
A combination of the two companies, according to the Financial Times, "has long been the subject of speculation because it would marry Kering’s strength in fashion, led by its powerhouse Gucci brand, with Richemont’s leadership in jewellery with Cartier and Van Cleef & Arpels".
A merger would also help both companies better compete against the mighty LVMH, whose 76% share price rise this past year means owner Bernard Arnault officially became the world’s richest man on Monday, eclipsing Amazon’s Jeff Bezos.
But for now, insists Rupert, there are no plans to sell the family jewels.
And why would he?
Deutsche Bank analyst Francesca DiPasquantonio described Richemont’s jewellery maison Cartier as "a purring panther in the roaring 20s" — an allusion both to its iconic Panthère range, as well as the pent-up demand that has been unleashed after a year of pandemic-related strictures.
But arguably the real progress for Richemont has been the rapid developments in the Rupert family group’s digital strategy, though it is still trading in the red.
For the record, Richemont’s free cash flow in the year to end-March surged to almost €1.8bn (up €766m from the previous financial year). Higher cash flow from operating activities, lower capital spend and lower lease payments (Covid rent relief) all helped.
That means net cash topped €3.39bn, prompting the Richemont board to double the dividend back to pre-Covid levels.
But the actual financial performance of Richemont’s digital businesses — made up of the group’s online sales of its traditional luxury brands as well as subsidiaries Net-a-Porter, Mr Porter, YOOX and The Outnet — was nothing near as convincing at a financial level.
The financial statements show that the group’s Online Distributors had a marked fall in revenue to €2.2bn (previously €2.4bn), with the operating result showing a reduced loss of €223m (€241m).
It seems an anomaly in a year when it was online or nothing for global consumers.
But the top line fell mainly because of the closure of several distribution centres in the first quarter of the year. Business picked up in the fourth quarter, however, with sales up 3% against the same period in the previous year.
CFO Burkhart Grund said that for the year as a whole, growth in the Middle East and Africa could not offset declines in other regions, though Europe and Japan showed relative resilience.
Still, Richemont managed to keep costs under control and preserve cash.
The bottom line is that the ebitda (earnings before interest, tax, depreciation and amortisation) loss for Online Distributors halved to €37m, despite increased custom duties related to Brexit). This would suggest a break-even point for the digital hub is closer, but certainly not imminent.
However, online retail sales will undoubtedly increase in importance over the next few years, and now already account for 21% of group sales (up from 19% a year ago).
It’s worth noting that Richemont’s direct-to-client sales — a combination of online and offline retail sales — represented around three-quarters of total group sales. It wasn’t that long ago that Richemont was predominantly a wholesale luxury brands business.
Richemont CEO Jérôme Lambert says it’s fortunate that the group’s digital transformation was already well under way when Covid hit.
"Many in-person interactions such as essentials, launches and the Watches & Wonders fair were successfully transformed into virtual events."
Richemont has embraced digitalised fashion shows, virtual boutique visits, and artificial intelligence. "This has served us well, and now over three-quarters of our sales are generated directly within clients," says Lambert.
Online retail sales at the group’s maisons (which include Vacheron Constantin, Montblanc and Van Cleef & Arpels) grew by triple digits. Online sales now represent 7% of the maisons’ revenue, against less than 3% a year ago.
"New omnichannel routes have been activated, such as Montblanc’s and Cartier’s ‘click from store’ and boutique appointments, and we have implemented new touchpoints with customers, notably in mainland China with nine new flagship stores on Tmall Luxury Pavilion."
There wasn’t much detail on the mooted partnership with Alibaba and Farfetch, other than "things are going to plan".
The joint venture, signed in November last year, aims to speed up the digitisation of the luxury industry and ensure Richemont’s brands have enhanced access to mainland China.
The effort includes a $300m investment by Richemont in private convertible notes issued by Farfetch. The group also intends to take a 12.5% stake in a joint venture being created in mainland China with Farfetch and Alibaba.
"Basically they are a tech company and we’re a luxury goods company in terms of our approach to online business," said Rupert, when pressed on his expectations for the partnership. "Our clients want duration, but they want ATAWAD [anytime anywhere, any device]. You don’t want to go on a website and the stock’s not available … so the blend is the best model."
He said the first benefits of the joint venture would be apparent soon. "I’m confident that the investment was worth it and it will become more apparent to everyone over the next two to three years."
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