Investors call time on Richemont’s growth

INVESTORS are calling time on Richemont’s impressive growth of previous years, as the sparkle of the luxury goods sector fades. In a trading update released on Wednesday, the owner of Cartier warned that first-half profit would decline about 45%.

The usually popular rand-hedge share closed more than 4% down on the day.

Information from financial market data company Iress shows a year-to-date decline in Richemont’s share price of 24% from a 6.29% gain by the end of 2015. This year could mark the first time since 2008 that the company experiences a sharp drop in value.

The Asia-Pacific region has been its crown since 2001, with Richemont’s sales there generally outpacing group sales.

But Nic Norman-Smith, chief investment officer at Lentus Asset Management, said: “Chinese consumers have come under some pressure recently as their economic growth rate slows, and the anticorruption measures put in place appear to have also hampered demand for luxury goods.

“The share prices of luxury goods companies have fared even worse, because many investors extrapolated their strong growth and assigned valuations that were simply too optimistic. Investing in even the best businesses at too high a price can lead to subpar investment returns.”

Electus Fund Managers equity analyst Neil Brown said other factors affecting the luxury goods market included a surplus in watch inventories, especially in Asia; a slowdown in global travel, which is a key source of luxury goods spending; and a change in customer preference to “travel experience” over “shopping experience”.

“Our Electus clients do not own Richemont shares, as we still believe that the share is overvalued. The five-month sales update was very disappointing, [especially] the jewellery slowdown, as this area had previously been much more resilient than watch sales,” Brown said.

The Geneva-based group said sales fell 14% in the five months to August from the year-earlier period at actual exchange rates. At constant exchange rates, sales fell 13%.

Mergence Investment Managers portfolio manager Dirk Steyn said the results were on the extreme weak side of the consensus expectation. “There was a hope in the market that the Jewellery Maisons would have been more resilient,” said Steyn.

In its announcement, Richemont said the “current negative environment as a whole is unlikely to reverse in the short term”.

Steyn said: “This is a much more negative statement than some market participants expected and will affect the medium-term forecast of Richemont’s prospect, to be downgraded by analysts, and we should expect the stock to remain under pressure.”

Norman-Smith said the luxury goods environment was likely to remain under pressure for the “foreseeable future”.



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