What a difference a year makes. In August last year Richemont shares were trading at around the R80 mark, putting them well into the value range. Today they are trading at about R123.57, which in a low-growth world and on a forward PE of 24x, puts the share back into pricey territory.
What has changed in the interim?
It may be that savvy investors simply recognised that a quality company had been over-sold in tough conditions that couldn’t last for ever. Certainly there were few signs of a rebound in consumer confidence late last year. In fact in 2016, for the first time since the financial crisis of 2008, the global market for personal luxury goods failed to grow, stalling at about $258 billion, according to research into the luxury market from Bain & Co.
The slowing of China’s economy and its government’s ongoing crackdown on corruption, paired with turmoil in the US and Europe from Brexit, terrorism, and the US presidential election, created a “new normal” of low single-digit growth and intense competition in retail markets – luxury and other – around the world.
Certainly Richemont’s results for the year to the end of March 2017 reflected these difficulties. The company reported a 33.6% decline in fully diluted headline earnings per share. Its biggest problem lay with the decline in the sale of luxury watch brands such as Vacheron-Constantin, Baume & Mercier, Panerai and Jaeger-LeCoultre. Watches account for 41% of group sales, and these sales fell by 15%.
To protect its brand the firm bought back its own inventory from the retail channel, so that retailers could not discount the product in a desperate bid to rid themselves of excess inventory.
However, a mere five months later the picture looks quite different. In a recent trading update Richemont reported that sales had increased by 12% at constant exchange rates, and 7% if one excludes the impact of the stock buybacks.
Investors will like the fact that the improvement was driven by sales increases in all regions, though it’s worth bearing in mind that any improvement will look good against the low base set last year.
Richemont executive chairman Johann Rupert has seen several luxury cycles come and go, and will not be too stressed by this one. However, in the research report referred to above, Bain reflected that slower sales of luxury goods was likely to become the new normal.
It expects a compound annual growth rate of 3% to 4% for the luxury goods market through 2020, which is significantly slower than the rapid expansion from the mid-1990s to the late 2000s. In these heady days the majority of companies were able to post double-digit growth because of favorable market conditions and few organisations worried about operating costs.
Now, Bain warns, the current luxury goods market — and that of the foreseeable future — will feature clear winners and losers, and strategy will become paramount. Rather than simply riding favourable tailwinds, management teams will need an explicit strategy for how they can outperform the competition. They will need to allocate resources accordingly, and they will need to watch operating costs and overall productivity much more closely.
Those measures may be a departure from how many luxury goods companies have been run in the past. Yet there is no realistic alternative. Over the next several years, the difference between strong executive teams and laggards will become apparent.
It seems Rupert took these words to heart. With the convenient exit of CEO Richard Lepeu who retired in March, he restructured the executive team, removing the CEO layer entirely, so that the company can react quickly to the challenges facing businesses in general and the luxury industry in particular.
In September Rupert went a step further, creating the position of chief technology officer and appointed digital whiz-master JJ van Oosten to the position. While Van Oosten (who holds a PhD in molecular genetics) has a background in consumer goods, not luxury goods, if anyone is going to find a way to successfully sell luxury over the internet, this is the man.