Morningstar | Richemont Reports 3Q Revenue Deceleration as Expected; Shares Attractive. See Updated Analyst Note from 11 Jan 2019
We are maintaining our CHF 90 fair value estimate for wide-moat Richemont as the company reported third-quarter results largely in line with our expectations. Jewellery maisons sales increased 8% organically during the quarter, in line with our expectations, specialist watchmakers came in weaker than expected with flat organic growth (we expected 2%), and other businesses and online were in line with our expectations with double-digit growth at YNAP. For the first nine months, sales excluding YNAP and Watchfinder grew 7% at constant exchange rates versus our expectation for a 7.7% annual increase.We continue to view the shares as attractive at current levels and suggest long-term investors take advantage of near-term uncertainty and cyclicality to build positions in this wide-moat name.
In the third quarter, sales growth decelerated across regions if newly consolidated online businesses are excluded. Sales in the Asia-Pacific region grew 10% versus 14% in the first half of the year, with sales in Hong Kong slowing because of lower tourist spending as Chinese purchases in the mainland accelerated from high single digits in the first half of the year to double-digit growth in the third quarter. Sales in Americas grew 9% (versus 13% in the first half of the year), sales in Japan grew 7% (8% in the first half), and sales in the Middle East and Africa fell 13% (versus a decrease of 4% in the first half). Europe was negatively affected by social unrest in France, which led to temporary store closures for consecutive Saturdays and weighed on tourism in the country (France accounts for around 6% of revenue excluding online businesses).
We continue to expect moderation of sales growth in the business excluding online to midsingle digits over the coming years. We are also factoring in a recessionary decline of sales in our 10-year explicit forecast. Our forecasts call for long-term operating margin improvement in the core business (excluding online) to 22%-23% from 20% over the last 10 years and 17% in 2018 through a mix of long-term pricing power, growing off the existing retail and productive infrastructure developed over the previous cycle, as well as rationalization of soft luxury businesses with low profitability.
Compagnie Financiere Richemont is engaged in the luxury goods market. Co.'s interests encompass some names such as Cartier, Van Cleef & Arpels, Piaget, Vacheron Constantin, Jaeger-LeCoultre, IWC, Alfred Dunhill, Montblanc and Net-a-Porter. Co.'s luxury goods businesses are separated into four segments: Jewellery Maisons (design, manufacture and distribution of jewellery products), Specialist Watchmakers (design, manufacture and distribution of precision timepieces), Montblanc Maison (design, manufacture and distribution of writing instruments) and Other Businesses (Alfred Dunhill, Lancel, ChloA(c), Net-a-Porter, Purdey, textile brands and other manufacturing entities).
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