Richemont results, very good, but sales momentum slowing

Richemont released numbers for their first half to end September this morning. The immediate news that people have chosen to focus on is that Johann Rupert will give up the CEO role at the beginning of March and focus just on the Executive chairman role. And to get his golf handicap lower than the current levels, whatever that is. So in a sense that is giving back a little of control. His family interests of course will still have voting rights and control the business. Remember that when I am talking about these numbers, that the per share numbers should be divided by ten, that is the GDR (Global depository receipt) that is traded here in Johannesburg. It is a ten here for each one in Zurich. The price, as at the close last evening in Europe is 52.98 Euros, or 64.30 Swiss Francs.


In order to get to the price here, you have to divide by ten, so 5.298 Euros and 6.43 Swiss Francs and then multiply by the exchange rate, 11.1051 ZAR to the Euro and 9.2102 ZAR to the Swiss Franc. All these reported numbers are in Euros, which does not quite make that much sense, as the primary listing is Zurich. Switzerland is however surrounded by mountains and the rest of Europe. If it wasn't for Switzerland my parents would never have met and I wouldn't be writing this letter. Thanks Switzerland, you mean more to me than cheese, chocolate or Richemont.


Sales increased 21 percent in Euro terms, only 12 percent in constant currencies. Operating margins increased by 150 basis points to 27 percent. Yowsers. Profits for the period increased by a whopping 52 percent to 1.081 billion Euros, earnings per diluted share, for the first half increased by 54 percent to 1.947 Euros. One tenth of that, 0.1947 Euros multiplied by 11.1051 gets you to 2.16 ZAR worth of earnings for the first half of the year.


Their net cash position is now more than 3 billion Euros, and represents around 11 percent of their current market cap. Wow. Everything kind of moving in the right direction. The key issues that are making people anxious, alongside the news that Rupert is stepping down as CEO is that sales growth seems to be slowing: "Sales growth rates moderated, as evidenced by the October sales which grew by 12 % at actual exchange rates. At constant exchange rates, they were 7 % higher. Richemont is seeing good growth in Europe, supported by Asian tourism which is compensating for slower domestic Asia Pacific sales."

Jumping around a little here, but if sales in the second half grow at roughly 11 percent, sales for the full year to March should top 10 billion Euros, roughly 10.25 billion by my back of the matchbox calculation. If margins are roughly the same as this time last year, 23 percent and not the same as the first half 27 percent, for the full year, earnings for the full year could only increase by around 16 percent to 2,359 billion Euros. Stick that back into Rands (divide by 10 first) and you get roughly 458 ZA cents worth of earnings for the full year. So, if the company manages to buy back roughly 1 percent of shares in issue (the A shares) then I would presume that around 573 million shares in issue at year end. That would translate to roughly 4.11 Euros worth of earnings. At 58.07 ZAR a share that means the stock trades on less than 13 times earnings forward, 12.69 to be exact.


Two of their key regions that were looking stodgy were pointing to a muted recovery, both Japan and North America recorded constant currency sales of 4 percent better than the prior period. Total group sales for the half topped 5.1 billion Euros, 2.103 billion Euros coming from the Asia Pacific region, the biggest surprise was from the European region, which accounted for 36 percent of sales and showed a 23 percent rise from the prior period. As Richemont say in the results release: "The region enjoyed good growth, with visitors/travellers driving the above-average increase. The highest growth rates were in the Maisons' own boutiques in tourist destinations, including the Middle East." The whole culture around "gifting" is still not completely understood by the Western world.


Just last weekend I was watching a program on the China News Network channel, it was on two different women in their mid to late thirties and their families anxieties around them not getting married. But in-between the day to day hectic lives of the two individuals, it had them celebrating a day called singles day in November, and even Christmas being celebrated. When asked, why do you celebrate Christmas, the answer from an academic was, we Chinese celebrate everything. And of course celebrating everything comes the practice of gift giving. There are certain anxieties around Beijing cracking down heavily on Chinese government officials being too conspicuous and raising suspicions of corrupt state officials. This could be a negative for sales in Asia. At the same time this morning we saw a stronger than anticipated Chinese retail sales. Better Industrial production and better fixed asset investments too.


But what now though? The stock is down today. That tells you that the balance of the market is disappointed with the recent sales growth slowing and the stepping aside of Johann Rupert. There is possibly one thing that is unknown and that is also the tailwinds that the company has enjoyed with a weakening Euro, those could turn. Ironically it would be when globally the economy is looking like it is continuing to improve. I am going to leave you with this, the richer people get, they want lots of average and poorly made "stuff" and superior well made items, costlier, but high quality. Imagine when Europe bounces back. We continue to accumulate the stock on weakness, it looks cheap for the first time in a while.