Richemont | Investing in the evolution of time

Richemont (JSE: CFR) continues to focus on transforming the Group to adapt to changes in consumer behaviour and ensuring the long-term sustainability of its brands. The margin dilutive impact of this strategy was reflected in the FY'19 results. Investments in Richemont's core brands, the optimisation of the wholesale channel and focus on digital (YNAP/Watchfinder) negatively affected profitability. Improved disclosure around the strategic initiatives, timing of the Alibaba JV and optimistic expectations for YNAP profitability creates clarity around the investment case and improved investor sentiment towards the stock.

The outlook for the Specialist Watchmakers Maison (SWM) is promising. Management communicated that it has reached the end of the optimisation of the wholesale channel. CFR's brands' discounting and inventory levels on the grey market are healthier than the sector average. Based on our assessment of the grey market, the average discount is currently 25% for the sector (CFR: 23%). The discount levels for CFR have improved sequentially (PY: 27%), while the sector weakened since Oct'18.

A slowdown in retail sales growth to 0% y/y in Q4 is key risk to margin recovery. Weaker consumer sentiment, trade war uncertainty and volatile currency impacts the outlook for retail sales in the short-term. It is a key risk to the investment thesis as 50% of the group's sales are based on tourist spending.