Richemont’s best-ever sales result wasn’t enough
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Richemont used the words “strong performance” in the title of its SENS announcement and even that didn’t help. The victim of a demanding valuation and a world that is running out of buyers for companies at high multiples, Richemont closed 12.9% lower on a day that sent shockwaves through the market. This is a company with a market cap of around R900 billion that the market tossed around like a rag doll.
I have it on good authority that that the narrative at the analyst presentation didn’t help, with a bearish overtone from iconic businessman Rupert and some awkwardness between company executives and analysts asking questions. Whatever the cause, it was a substantial sell-off despite releasing a great result.
Sales for the year ended March 2022 were up by 46% to a best-ever result of EUR19.2 billion. Operating profit more than doubled, with operating margin increasing by a substantial 650bps to 17.7%. Profit increased by 61% and the net cash position grew by 55%.
The Jewellery Maisons division achieved 49% sales growth and a 34.3% operating margin. Jewellery for the rich and famous is a profitable place to be, as those people never seem to be too bothered by global economic conditions.
Specialist Watchmakers did even better, growing revenue by 53%. Margins are structurally lower in this business than on the jewellery side, coming in at 17.3%.
Online Distributors only grew revenue by 27%, so that isn’t a spectacular performance by any means compared to the rest of the business. I’m still scratching my head slightly over the thought of using online channels to buy a timepiece that costs more than a car. It feels like the in-store experience must be part of the magic, with 76% of group sales achieved through group-owned channels and the rest on a wholesale basis to independent stores. Perhaps once you’ve bought your third Instagram Flex timepiece or necklace, you want convenience above all else. The online business achieved operational breakeven if you exclude exceptional bonuses to employees and the Feng Mao joint venture with Alibaba. Put another way, the online business is still making losses.
The Other segment includes brands like Montblanc, despite having a segment name that makes it sound like the unloved stepchild. It grew sales by 53% but still generated a substantial operating loss of EUR47 million.
Russian oligarchs enjoy their yachts (the ones they still own at least) and they seemed to like Richemont products as well, with the suspension of activities in Russia bringing a EUR168 million knock to earnings.
Interestingly, Richemont also provided comparisons to the year ended March 2020. China is a key market for Richemont and so the 2020 financial year was impacted by the pandemic but obviously not to the same extent as the 2021 financial year. Sales in this period are 35% higher than in FY20 and operating margin is 700bps higher. Headline earnings per share (HEPS) increased by 62% vs. FY21 and 116% vs. FY20.
To put the latest financial year into perspective, FY22 profit of EUR2,079 million isn’t much lower than EUR2,220 million for FY20 and FY21 combined!
A dividend per share of CHF2.25 per A share (the ones that us plebs can get exposure to, as the unlisted B shares are held by Compagnie Financiere Rupert) has been proposed. A special dividend of CHF1.00 per A share has also been proposed. HEPS per A share is EUR3.762.
Be careful with currencies here and be even more careful with the depository receipt structure, as you need to own 10 Richemont depository receipts on the JSE to be equivalent to one A share.
At Friday’s closing price of R149.69 and using Friday’s exchange rates as well, the dividend yield (including the special dividend) is around 3.5%. The way to calculate this is to convert the dividend to rand and then divide it by 10 to obtain the dividend payable per depository receipt. You would then divide this by the share price.
Has the market overreacted here? I would keep an eye on Richemont this week. There could be some volatility if the market decides that the results are more important than the analyst presentation.
