Richemont’s online gamble
Richemont’s move into selling luxury goods online is a fundamental change
Almost a year ago, Richemont dipped into its enormous cash pile to buy a big chunk of a company it already partially owned.
The company was Yoox Net-A-Porter.
So, how did that turn out?
Therein lies a story. The purchase of the 50% of YNAP (as the combined company of Net-A-Porter and Yoox is now known) Richemont didn’t own somehow didn’t seem very important to outsiders at the time, except for the enormous $3.3bn price.
Richemont’s share price barely moved on the news.
But for Richemont, the purchase marked a substantial departure, because until then it was generally accepted wisdom that people won’t and don’t buy $100,000 watches, for example, on the internet.
They do so in expensive stores in global capitals with immaculate shop assistants fawning all over them.
The purchase marked other changes too. Richemont until recently was really what is called in the industry a "hard goods" retail company, focusing on consumer durables such as watches and jewellery rather than "soft goods" like leather goods/apparel.
Richemont also sold, in traditional style, its own products such as Cartier jewellery, Piaget, Vacheron Constantin and Jaeger-LeCoultre watches; and Montblanc pens.
The third difference is that Richemont focused on the very high end.
YNAP, however, is a totally different entity.
It sells luxury goods from a huge selection of designers, not only Richemont’s own product line; it sells largely "soft" lines of broadly upmarket clothing; and it sells (incredible but true) products that sometimes cost less than a king’s ransom.
The change in approach actually began some time back, when Richemont controlling shareholder and chair Johann Rupert for the first time appointed some tech executives to the board, and actually appointed a chief technology officer.
The changes included the appointment of Nikesh Arora, previously an executive at famed Japanese tech investor SoftBank, and (gasp) several women.
These included London School of Economics professor Keyu Jin and Maria Ramos, until this week the CEO of Absa.
So back to the question, how has this turned out?
Technically, pretty well.
Annual results are only out in May, but for the third quarter, sales rose 25% at actual exchange rates and 24% at constant exchange rates.
However, that was mainly because of the consolidation of YNAP and a pre-owned online retailer, Watchfinder. Excluding this effect, sales were up 6%, more or less in line with what the market was expecting.
Richemont’s share price has been under pressure, like other luxury goods sellers, because growth in China is declining unexpectedly fast.
Over the past year, Richemont is down about 22%, about the same as Swiss watchmaker Swatch but notably less than the hulking industry giant LVMH, which is flat over the past year.
The move into online selling of luxury goods might fundamentally change Richemont’s business model, but analysts generally like the switch.
In the short term, things might be a bit rough, but, over the medium term, Avior Capital Markets analyst Atiyyah Vawda says she likes the look of the company. "The revenue mix is very different to what it was three years ago." The business is leaner from a cost base perspective and there have been changes to the governance structure. Management are younger, they are more flexible, more focused on the millennial consumer and have an aggressive digital strategy. Furthermore, jewellery is outperforming, while the transformation of the watch division is under way.
Financially, Vawda says margins are at a low point, but the hopes for a V-shaped turnaround are unlikely given lower Chinese growth.
But management have always been conservative, so the company still has enormous firepower. Richemont has about $1.8bn in cash; compare that with Hermès, which is about 20% larger but sitting on $3bn in debt.
As it stands, Richemont is still moderately expensive, trading at 19-times forward annual earnings, much like sector heavyweight LVMH and some smaller players such as Burberry, which both trade on a p:e ratio of about 20.
The risks inherent in the share are still palpable; most analysts rate it a "hold" and that’s partly to do with slightly lower expectations of global growth, and partly to do with China.
However, one of the risks not visible yet is whether the online gamble will work. Richemont has been involved in online sales for some time and was party to establishing the sector, supporting London-based Net-A-Porter early in its existence and helping to organise the merger with Milan-based Yoox in 2015.
The combined company has a turnover of about $2bn, more or less a fifth of Richemont’s turnover at the time.
The merger, however, resulted in the falling out between the founder of Yoox, Federico Marchetti, and Net-a-Porter founder and general British fashion icon Natalie Massenet, who left the company after the merger, disappointed mostly in the price.
Massenet is now a board member of YNAP’s biggest rival, Farfetch.
Farfetch features design houses such as Burberry, Givenchy, Prada, Gucci and Dolce & Gabbana.
Yoox features Moschino and Stella McCartney but also Prada, Gucci and Dolce & Gabbana. And there are others.
"Competition is intensifying, but the market is not yet saturated. There are definitely opportunities for growth in online luxury — especially in China" says Vawda.