LONDON – Johann Rupert remains an Internet skeptic.
The chairman of Compagnie Financiere Richemont SA may be about to complete a merger of his Net-a-Porter Group with Yoox Group to create a fashion e-commerce behemoth with revenues of 1.3 billion euros, or $1.45 billion, a year, but he still is cautious about e-tailing’s role in the luxury world.
Speaking as Richemont reported a 35.4 percent drop in net profit for fiscal 2014-15, Rupert riffed on e-commerce, saying he saw it more as a service to clients than anything else – although he’d like to see it grow.
“I don’t know one (of our maisons) where e-commerce is bigger than the largest single brick-and-mortar store. It represents one percent of sales for us. It’s frankly not gigantic for any luxury goods company,” the ever-blunt chairman said.
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He added that it is difficult for him to say “e-commerce” and “luxury goods” in the same breath.
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“We look at it as a service to customers,” he said, adding that trust factor was still “a bit of a problem, with all the fakes that are around. Still, we’ll continue to grow it and it will help us keep our clients happy. I would actually love more of it because that would mean I wouldn’t get raped on Fifth Avenue, in Ginza or in shopping malls around the world.”
Rupert has long been known to favor the world of hard luxury in which Richemont specializes – with brands including Cartier, Van Cleef & Arpels, IWC and Panerai – over the invisible world of e-commerce and sources had speculated that was one of the factors behind the merger of Net-a-Porter and Yoox.
Richemont on Friday broke out figures for Net-a-Porter for the first time, revealing that the e-commerce subsidiary had a loss of 2 million euros, or $2.5 million, in the year ended March 31, compared with a loss of 12 million euros, or $16.1 million, in the previous 12-month period.
Net’s sales were up 30 percent at historic rates, and 22 percent at constant rates, while EBIT, or earnings before interest and taxes, was 1 million euros, or $1.27 million. The company’s cash flow was 16 million euros, or $20.3 million euros.
The merger, which is set to be finalized in September, will give Net’s parent Richemont a 50 percent stake in Yoox Net-A-Porter Group, and 25 percent of the company’s voting rights. The new Yoox Net-a-Porter Group will be quoted on the Milan bourse.
Richard Lepeu and Gary Saage, co-chief executive officer and chief financial officer of Richemont, respectively, have been named to the board of directors.
Rupert’s views on e-commerce also may stem from the fact that Richemont has much more pressing concerns than growing its online sales. Richemont and other luxury groups are feeling the heat from the sharp slowdown in China; quarter after quarter of currency swings; lopsided tourist patterns; pricing differentials, and ongoing political challenges in Hong Kong and Macau.
There seems to be no end in sight to the turmoil and Richemont said Friday in revealing its steep profits decline for last fiscal year that the new one is off to an equally disappointing start, mainly because of the continuing slowdown in the Asia-Pacific. Shares in Richemont dropped 1.7 percent on Friday on the outlook.
In 2014-15, sales in the Asia-Pacific – which accounted for 39 percent of the Richemont total – fell 1 percent at actual exchange rates, and 6 percent at constant ones.
Richemont said in its year-end financial report Friday that decreases in Hong Kong and Macau, the group’s largest market, were particularly acute in the second half, notably affecting the watch category and wholesale channel. The jewelry category was “resilient, achieving stable sales at constant exchange rates,” the company said.
In April, the first month of the new fiscal year, Richemont noted overall sales increased by 9 percent at actual exchange rates, and decreased by 8 percent at constant ones, with all regions reporting growth except for Asia Pacific, which continues to be affected by the turmoil in Hong Kong and Macau.
Pro-democracy demonstrations that began last October continue to disrupt footfall and sales in those markets, as has the Chinese government’s crackdown on bribery, which hit the luxury watch market in particular.
Richemont also said that wholesalers’ anticipation of worldwide pricing adjustments in May naturally slowed purchases in April, and that the first two weeks of May indicated some “normalization” of the wholesale market.
But the group believes the most recent tweaks to pricing should restore consumers’ desire to spend. In May, Richemont slashed prices in dollar-pegged zones such as China, and increased them in Japan and Europe.
Saage said the effect of the price changes on Richemont’s revenue would be broadly neutral. “We really want the prices to be the same – without tax – everywhere in the world,” he said.
Richard Lepeu, co-chief executive officer of Richemont, said the company is now “back to normal” with regard to worldwide pricing. With prices now adjusted to compensate – as much as possible – for the recent currency swings, the company believes sales for the overall April/May period will likely be flat at constant rates.
During the same conference call, Bernard Fornas, co-ceo, said pricing differences have a major impact on the flow of Chinese tourists.
“The main reason for the Chinese to travel is to have a shopping experience – it’s not to go and visit a castle or whatever. It is to have a shopping experience. So what do they do? They check the prices on their mobiles or specific apps and they see where it’s better for them to go shopping so they can get the best price. Now more than ever it’s important that we adjust our prices. Now, prices are back to normal,” he said.
Last month, Global Blue reported that Chinese tourists were abandoning Hong Kong for Europe in droves. Global Blue data from March showed a record increase in Chinese tourism spending outside China and Hong Kong. It rocketed 122.4 percent year-on-year, following a 51.9 percent increase in February.
Thanks to the March bonanza, Chinese spending in markets outside China was up 67 percent year-on-year in the first quarter, compared with 32 percent in the fourth quarter, and 18 percent in 2014.
While Richemont may be making all the right moves with regard to pricing, analysts believe the company will continue to face difficulties in the short term due Hong Kong and Macau.
“The market situation in Hong Kong and Macau is reported to be difficult – very difficult, I would say, based on our trip just concluded,” said Luca Solca, managing director equities at Exane BNP Paribas. He said analysts’ expectations for Richemont’s growth in April was 3 percent on a constant currency basis. “Richemont has missed this significantly, with constant currency growth at minus percent,” he said.
Barclays in London called the April decline “disappointing,” adding that trading results for the month are “likely to be taken poorly, with concerns about the Hong Kong market prominent.”
In its note, Morgan Stanley said the April figure was “materially below (market) expectations” which ranged from minus 2.5 percent to plus four percent.
Thomas Chauvet of Citi pointed out that in April, sales in Asia, not including Japan, were down 20-25 percent, contributing to the overall sales decline at constant currency.
April’s numbers came on the heels of a tough year, where Richemont saw its balance sheet plagued by violent currency swings, pricing differentials and the Swiss National Bank’s decision to de-peg the Swiss franc from the euro.
On Friday, Rupert called the group’s performance “resilient despite a difficult situation in Hong Kong and Macau, a demanding basis for comparison in Japan, and the generally volatile economic environment.”
Foreign exchange losses dug their teeth into Richemont’s bottom line in the 2014-15 year, with the company reported a 35.4 percent drop in net profit to 1.33 billion euros, or $1.69 billion.
Last month, Richemont issued an unscheduled announcement that full-year net profit would plunge 36 percent, due chiefly to non-cash, currency translation effects linked to the investment strategy for its 5.4 billion euro, or $6 billion, cash pile and to its hedging program linked to the more expensive Swiss franc.
Over the past year, currency fluctuations have been creating chaos on the balance sheets of public companies. They watch their profits evaporate when earnings from abroad are translated back into their strong home currencies.
Rupert added that going forward costs, which are measured in euros, would also increase as a result of the Swiss National Bank’s decision.
The company has more than 8,700 employees in its manufacturing, distribution and head office functions in Switzerland, and Rupert said that removing those functions from the country is not an alternative.
In the period ended March 31, sales were 10.41 billion euros, or $13.22 billion, 3.9 percent higher than last year on a reported basis and 1 percent higher at constant-exchange rates.
Operating profit in the period grew 10 percent, boosted by an extraordinary gain from a real estate disposal on Fifth Avenue in Manhattan. Richemont said that operating profit was stable compared with last year.
While sales in Asia-Pacific and Japan were both down, Richemont did see growth in Europe, Middle East and Africa, and the Americas, with retail and wholesale sales notching low single-digit gains.
The company said its jewelry brands and specialist watchmakers delivered sales growth and broadly maintained their operating margins through successful product launches and, in certain markets, price increases.
Lower precious metal prices and cost containment measures helped mitigate the single-digit sales growth and the impact of foreign exchange rate movements, Richemont added.
During a presentation to analysts Rupert, who was puffing an e-cigarette as he sat alongside company principals, talked about Lancel and Dunhill, which contributed to the lion’s share of the 64 million, or $81.3 million, in losses in Richemont’s soft luxury division.
“We have not been serious enough about them. We are hard luxury goods people, we are jewelry and watches people,” he said, adding the current teams at Lancel and Dunhill “are going to fix” those brands. “We will have to allocate capital to fix these companies,” he said.
Richemont has had a stake in Dunhill since 1988 and has owned the company outright since 1998, and has owned Lancel since 1997. It has attempted various turnarounds over the years, with varying degrees of success but the companies have traditionally been loss making.
He said that Peter Millar, the high-end American casual wear and golf brand, is notching 50 percent growth per year in e-commerce sales. “The e-commerce is growing faster than Net-a-porter and Yoox,” said Rupert, who purchased the company in September 2012. “I wanted to buy them so they could show us how to run a textile business, and show us the skills in buying and in supply chain.”