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Richemont’s transformation includes a luxury valuation

Investors should be on watch, the revival of bling won’t happen in a straight line.

What a difference a year makes. Richemont’s swung from a massive profit warning, to firing on all cylinders.

On Wednesday the company reported that sales excluding currency movements rose 12% in the five months to August 31. That’s the fastest sales growth for the period since 2012, helped by consumers snapping up its Cartier watches and love bracelets.

 

It’s a far cry from last September, when Cie Financiere Richemont  reported a slump in sales and warned that its first-half profit would fall by 45%. 

It wasn’t the only group to founder last year, and the period turned out to be the nadir for the purveyors of bling, with strong performances ever since from the luxury powerhouses.

 

Swiss watch exports may finally have snapped their slump.

Meanwhile, Richemont has been pro-active in buying back and recycling excess stock to ease overcapacity in the market. It is continuing this disciplined stance, by controlling supplies to third party retailers. That should put it in good stead if the export recovery picks up steam.

But its shares are up almost 50% over the past year. They trade on a forward price earnings ratio of 24 times, at a premium to Swatch Group, and also to the Bloomberg Intelligence luxury peer group, so it looks like most of the good news is already priced in.

 

 

With such a premium, investors should be on watch. While indications are that the top-end timepiece upturn has further to go, as Gadfly has argued, it won’t be a straight line recovery.

Richemont’s latest performance benefited from easy comparisons and one-time gains, including the excess stock buybacks. Excluding this, sales growth was 7%. Comparisons become more difficult over the coming months, as sales began to stabilise in the second half of 2016.

Meanwhile, revenue growth in Europe lagged most other regions as the strength of the euro weighed on demand. There are risks the currency could continue to strengthen, while a revival of terrorism fears could further deter the lucrative travelling luxury consumer.

And Richemont has issues closer to home. Last November, it announced a sweeping overhaul of its board, making way for a younger generation of managers. Among them was Georges Kern, the highly rated head of watchmaking. But he quit in July to become chief executive of Breitling after its private equity takeover.

There was no comment on this on Wednesday, but it’s an unhelpful development. Chairman Johann Rupert continues to steer the group: it typically takes decisions for the long-term rather than making any knee jerk moves, so it should be able to withstand the defection.

The company also has plenty of financial firepower: it had net cash of 5.8 billion euros ($7 billion) at March 2017.

There is no doubt that Richemont is in a much more comfortable place than it was 12 months ago. And it has the capabilities to both take advantage of a recovering watch market, and withstand any knocks if that doesn’t quite come to fruition.

It will certainly need them. The valuation shows that investors are betting that the company’s sales and profit rehabilitation will continue. If this doesn’t materialise, a year from now, Richemont may well have to to turn back time.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

© 2017 Bloomberg

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