EUR 850.00 For Business Accounts Only

Morningstar | Richemont's Results Broadly As Expected, Investment Thesis Is Intact; Shares Attractive

We are maintaining our wide-moat rating and fair value estimate of CHF 91 for Richemont shares after the company reported full-year results. Revenue was a little higher than we expected (27% growth including acquisitions and 8% excluding acquisitions versus 25% and 6% in our forecast). Operating profit was 3% below our forecasts largely driven by higher-than-expected losses in online and other divisions (which include fashion and leather brands).

Richemont’s jewellery category continues to perform strongly with 10% growth during the fiscal year (versus its luxury jewellery category growth of about 7% in 2018). Margins at Jewellery Maisons' improved to 31.5% from 29.9% in 2018, albeit still lower than the 32.3% we had forecast, driven by higher marketing investments. We expect Jewellery Maisons to grow faster than other businesses (apart from the online division), averaging 5.5% annually over the next 10 years and contributing positively to margins with sustainable pricing power and a positive mix effect.

Specialist watchmaker sales grew by 10%, or 2% excluding prior-year inventory buybacks. We continue to believe the underlying end-client demand for Richemont’s watch brands remains solid, following two years of consecutive double-digit sales growth of watches in its own retail channels. Management confirmed wholesale overcapacity reduction measures were nearly complete. Richemont manages operating costs tightly in the watchmaking division, with no cost increase on the underlying cost basis in the year and its operating margin improved to 12.7% from 9.7% in 2018. We agree with management that growth from assets developed in the past (such as 295 directly operated stores) with tight cost controls, and without the headwinds caused by capacity reduction initiatives, should restore watchmaker margins. We forecast these to increase to the high teens over time.

We retain our view that weakness in the watch segment is related to overcapacity and is not structural, hence we don’t see the need for major cost-base reductions.

Yoox Net-A-Porter (YNAP) is clearly in the investment phase and aiming to restore its growth, which lagged that of online luxury industry during the last year and resulted in an operating loss. We continue to forecast YNAP's operating contribution as only marginally positive over the next several years, with a profitability ramping up toward the end of our 10-year explicit forecast, driven by scaling of warehousing and G&A costs. Management hinted at the possibility of an omnichannel offering at YNAP with order backfilling from partner inventory should the demand exceed existing wholesale inventories. Investors have been skeptical about YNAP’s wholesale business model. However, we believe its significant customer base and display alongside Richemont’s luxury brands is an asset to its brand partners, and further expansion into a platform business model, while not currently being discussed, could be an option in future (as Zalando did, for example).

Chinese demand remained steady throughout the year with no meaningful deceleration, but more purchases were made by locals than tourists.