Richemont’s forecast takes shine off the return of bling post-Covid-19

Put the revenge shopping on hold.

With Chinese consumers returning to top-end boutiques, it would be tempting to think that the luxury industry will bounce back quickly as coronavirus lockdowns ease. But on Friday, watch and jewellery maker Richemont provided a sobering assessment of the prospects in the pandemic era for the bling behemoths.

Chair Johann Rupert warned of up to three years of “grave economic consequences,” as the owner of the Cartier brand reported a 22% fall in operating profit in the year to March 31. He described the current crisis not as a pause, but a reset. That assessment is a lot more downbeat than those provided by the likes of rivals LVMH Moet Hennessy Louis Vuitton and Gucci-owner Kering.

Some of the difference may be because about 70% of Richemont’s sales come from watches and jewellery, often among the most expensive items on any luxury wish list. When shopping for revenge with the coronavirus’s economic costs still piling up, a $2,000 (about R37,160) handbag may be higher up the list of priorities than a $10,000 watch.

It’s only when true discretionary spending returns that Richemont will benefit from its efforts to clean up its watch business after an excess of Cartier, Panerai and IWC models risked hurting its brand appeal. The company has a strict rule that it doesn’t supply more watches to boutiques than are being sold. Still, with exports of Swiss timepieces already feeling the pain, plus the high fixed costs in watchmaking, Richemont’s caution here is justified.

But there seem to be some reasons for optimism too.

Richemont has been building a powerful digital business, positioning it to benefit from a surge in online shopping as consumers shy away from returning to malls and department stores. In 2018, the company paid $3.3bn to take full control of the high-end luxury platform Yoox Net-a-Porter; purchased the Watchfinder website; and formed a joint venture with Alibaba, the titan of Chinese e-commerce.

Online transactions accounted for about 12% of global luxury sales in 2019, according to Bain estimates. But that could rise to about 30% by 2025. It’s true that during the lockdowns Yoox Net-a-Porter, known as YNAP, was hurt by warehouse closures and the division still needs to make a profit. But as competitors seek to prosper in this market, Richemont’s digital proposition could become an interesting acquisition target too.

Meanwhile, Richemont halved its divided, to Sf1. While it had net cash of €2.4bn, it decided to prioritise prudence. However, it is also considering giving shareholders the option to buy shares at a future date, at the price when the dividend was declared. While the company has yet to work out the details, that implies that management believes conditions will eventually get better. There would be little upside for loyal investors otherwise.

Still, shareholders seem to be taking Rupert’s downbeat assessment to heart. The stock fell about 3% on Friday. On a forward price-to-earnings basis, it trades at a significant discount to the Bloomberg Intelligence top luxury peer group.

Richemont typically takes a long-term view. Its perspective on the Covid-19 pandemic looks no different. The upside is that it may transform the YNAP deal, which was a rare strategic flip-flop for the group, into a prescient purchase.

• Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries.

Bloomberg