EUR 850.00 For Business Accounts Only

Morningstar | Richemont's Margins Pressured by Special Items; Shares Look Attractive

We are maintaining our fair value estimate for wide-moat Richemont as the company announced that first-half revenue excluding YNAP and Watchfinder increased 8% in constant currencies, in line with our full-year expectations. We believe the current share weakness presents a good entry point for investment.

Including acquisitions and currency impact, sales grew 21% at actual exchange rates versus our full-year expectation of 18%. Operating margin came under pressure, declining to 16.6% from 20.7% a year ago, affected by several special items such as acquisition- and disposal-related charges of EUR 159 million; excluding those, margin would have been 19%. Operating margin excluding online businesses improved to 21.1%, driven by strong operating leverage at Jewellery Maisons.

Jewellery Maisons, which comprises brands such as Cartier and Van Cleef & Arpels, continued to perform strongly with 9% growth in the first half at actual exchange rates (11% in the five months to Aug. 31). Profitability in this segment also improved markedly with operating profit growing 19% and operating margin reaching 33.8%, thanks to increased volume, higher jewellery business and share of retail, and good cost control. Specialist watchmaker sales increased 2% in the first half (2% growth for the first five months to August). Sales in own boutiques grew at a double-digit pace, proving the continuing appeal of the group’s brands, but wholesale sales remain under pressure, affected by control of sell-in and distribution optimization. The division margin came under pressure through inventory buybacks and declined to 18.5%. Excluding the buyback charges, the division operating margin would have increased 130 basis points.

We believe investors are concerned about the slowdown in September, continuing sluggish development in the wholesale channels with no anticipated inflection point, as well as the viability of YNAP acquisition, given the increasing competitiveness of the online luxury space with other players taking share. We see increasing share of retail and online as a long-term positive for the watch business, helping address the supply imbalance and grey-market channel issues, as well as gain more direct customer information as management mentioned.

As for YNAP, despite being a meaningful contributor to sales of the group, it is much less important in terms of profits (we forecast only around 3% EBIT contribution by fiscal 2020). Further, it remains the leading e-commerce platform with 3 million active users (3 times more than Farfetch) with higher customer engagement (three orders on average per active customer versus two for Farfetch). However, the online luxury space is still immature and market leaders are yet to form over the coming years. We believe the online luxury space will be dominated by several strong global players, given the power of the brands and their unwillingness to rely excessively on one distributor or stretch too thinly between channels, given brand trivialization risk. Further, it is a natural step for Richemont to gain higher share of distribution control from displaying its watch and jewellery brands on the YNAP platform (Cartier watch collections and six out of eight of the group’s specialist watchmaking brands have been launched on Net-A-Porter and Mr Porter). The partnership with Alibaba is also an interesting development, allowing Net-A-Porter and Mr Porter offerings to be displayed to an audience of the most affluent of the 600 million-plus TMall customers.