Richemont edges into the digital age
Johann Rupert wants to address the demands of luxury consumers in a rapidly changing trading environment
The underwhelming dividend declaration by Richemont for its financial year to end-March, coupled with a sizeable bond issue recently, suggests the Rupert-family luxury brands conglomerate may be weighing up acquisitions.
The company certainly has the balance sheet to accommodate a more generous payout — but Richemont is on the cusp of a transformation process aimed at positioning the business at the cutting edge of the customer interface.
Analysts at Richemont’s investor presentation last week reminded executives that chair Johann Rupert had pointed to a sustainable annual dividend increase in the midteens.
One noted: "You’ve had mid-single-digit dividend increases for two years now.
"I think this is probably not what some investors signed on for."
Richemont CFO Burkhart Grund conceded that the 15% annual dividend increase had been floating around for a long time.
"I personally haven’t found when it started, but we can definitely have another look at that."
He argued that a 6% growth in dividend in today’s environment was still "an honest proposal".
The market’s verdict was to beat down Richemont’s share price after the release of the results.
Grund reflected: "Okay, there is a share price reaction. Fine, but I think once again you need to look at the shareholder return over the long term, so that’s our view on that."
At this juncture Richemont’s balance sheet is well-reinforced thanks to reassuring operational cash flows. In the year to end-March cash flow generated from operations improved by a hefty 44% to €2.7bn.
The €827m increase was driven by a higher operating profit and favourable working capital movements (working capital inflows came in at €234m against a €29m outflow in the previous financial year).
Capital expenditure for the year was €487m — representing 4.4%. This is on the low side against Richemont’s average ratio of capex to sales of between 5% and 7%.
There was a slew of new store openings including Van Cleef & Arpels and Chloé stores in Ginza, a Cartier store in Cannes and a Dunhill store in Dubai. Montblanc rolled out a new retail format with 41 additional locations in the financial year, while underperforming Dunhill kicked off its revamped retail concept in London.
At the end of the financial year, Richemont’s net cash position was close to €5.3bn — around €520m down on last year after the strategic investment in travel retailer Dufry as well as substantial investment in properties.
One noticeable change in the Richemont balance sheet is that shareholders’ equity now represents 57% of total equity and liabilities — a marked shift from 77% in 2017 after a €4bn bond issue was undertaken in March this year.
Richemont said the bond issue represented an opportunity to secure long-term financing in a low-interest-rate environment. The issue came in the nick of time, with Richemont currently finishing off an offer to buy out the shares it did not already own in high-end fashion retailer Yoox Net-a-Porter (YNAP).
But the sum raised in the bond issue suggests Richemont could be scouting for other acquisitions — as well as capitalising on chances to reinforce and broaden the YNAP platform.
The YNAP deal — executed via a tender offer that has already garnered Richemont more than 95% of the issued shares — forms part of Rupert’s determination to ensure the group embarks on a transformation journey to address the complex demands of luxury consumers in a rapidly changing trading environment.
In essence, this means Richemont has to develop a robust omnichannel proposition that blends physical and digital channels to stay relevant to fast-changing customer experiences.
YNAP could well be the catalyst that gives a new edge to classic brands like Cartier, Vacheron Constantin, Van Cleef & Arpels, Montblanc and Piaget.
This will, however, take time to bring to full fruition. Meanwhile, Richemont executives are maintaining a calm long-term view.
At last week’s investor presentation, an analyst suggested Richemont was content to lose market share in luxury watches. "You can see [rival brands] Rolex, Swatch Group and LVMH clearly winning market share. Once you lose share, it’s very hard to get it back."
Grund was philosophical. "Now, are we happy to lose market share? Would I answer yes? Probably not, but then again — and I say this in a very relaxed fashion — we don’t really look at the short term here."
He continued: "Now, is it one year up, one year down? Fine. The Maisons have existed for many generations, and if you look back at the history of Vacheron Constantin, for example, let me calculate, probably more than 10 generations, and I don’t think they built the Maison by looking at market share."
In the past two years Richemont has re-purchased its own brands to address what was perceived to be an unhealthy inventory situation. In other words, long-term brand equity takes precedence over short-term market-share movements.
Whether Richemont’s classic luxury brands can use YNAP’s online sales platform or tap into the digital model to boost sales remains to be seen.
It is, though, significant that the YNAP transaction has been hailed as a milestone in Richemont’s transformation journey.
Grund stressed that YNAP operates in an attractive area of the market where there are high barriers to entry. "We believe there’s a meaningful opportunity to help them grow the business over the long term and further strengthen their leading positioning in online luxury retailing with the long-term financial backing of Richemont."
Asked directly about the possibility of mergers and acquisitions — including outside the so-called "soft luxury" segment (leather goods and top-end fashion) — Grund deftly sidestepped giving a direct answer to the question.
The YNAP buyout seems to suggest the soft luxury side, which has in the past been Richemont’s weak spot, will be aggressively bulked up.
But perhaps the key number from the YNAP deal is that Richemont’s e-commerce sales will shift from around 1% of total sales to 17%.
Expect that figure to stride ahead in the next three years — especially if there are complementary deals in soft luxury goods and associated retail channels.