Richemont trading update is very good

There was a trading update from one of our favourite companies Richemont this morning. We group Richemont with Nike and McDonald's in a segment, aspirational consumerism. There are folks who are aspiring to consume products that were once out of their reach, but because their circumstances have improved markedly from a generation before, they are able to now. In Richemont's case it is the nouveau riche, and their product is an "expensive" purchase. In some parts of the world people eat baked beans but drive a swanky car to show that they have "arrived", in other parts of the world it is a flashy watch and piece of jewellery. And that is the audience that Richemont are trying to capture, not only in the old world but also in the newer and emerging nations, in particular China.


You can find the full release from the Richemont website, a rather long winded headline: Strong trading indicates likely increase in operating and net profit for first half year of between 20% and 40% against the comparative prior period. What strikes me immediately is that is a fairly wide range. No, a very wide range, but you will see why now, it has to do with uncertainties around currencies. There were obviously going to be some currency translations here, but this is better for Richemont, a weaker Euro. Richemont has a large number of sales in Asia, and the Euro has been very weak.


On a reported basis (in other words in Euros, their reported currency) their sales for the four months (ended July 2012) were 24 percent higher. BUT, in constant currencies sales were "only" 13 percent higher. Not bad for tough times I guess. The stock is up handsomely this morning, in Rands we saw a five percent plus gain straight out of the blocks. We continue to acquire the stock, and have been adding on weakness. Let us presume for a second here that Richemont profits come in the middle of the range, at the half year stage to September 30 2011 last year, the companies recorded operational profits of 1.075 billion Euros.


On an earnings per share basis (and based on an increase of 30 percent) the next number should clock around 1.64 billion Euros. The stock trades at 58.85 Swiss Francs a share. Bleh, Euros, Francs and Rands. One Swiss Franc buys 8.39 Rands. The price then in Zurich at the current exchange rate is 493 Rands, a little over that. But remember that our price here is a one tenth of the price in Switzerland, because the Global Depositary Receipt traded here is a one for ten. And that is how you get to a current price comfortably above 49 Rands a share. Half year earnings around 1.66 ZAR a share, is the stock stretched at 50 ZAR? If it was trading at 75 Swiss Francs a share my answer might be yes, but they are growing strongly through tough times. And as luck would have it, Prada have just reported revenue growth of over 36 percent for the half. See, Johann Rupert is right, people like nice things.