Re-look, recalibrate, stay long

Talking of annual reports, I saw the Richemont one yesterday, it is available to download: Annual Report. On reading the report it cemented the investment thesis, one cannot underestimate the quality of the brands and the enduring qualities that have been built over centuries. The company is essentially a jewellery manufacturer and seller and a specialist watch manufacturer (nearly 80 percent of sales) and seller. These are devices and pieces that can be kept in your family for generations, I was once reminded by a client who rightfully took objection to a remark that I had made about a fancy watch. Montblanc is not necessarily one of their businesses to worry about, it is less than 7 percent of sales (6.85 percent to be "precise"), but that business has been flat for three years, sales wise. I guess the percentage contribution from a sales perspective will look less in time.


Equally, the rest of the business, which represents 14 percent of total sales and comprises of Net-A-Porter (online), Purdey (shotguns, really!), Peter Millar (high end golf essentials), Chloe (bags and accessories), Dunhill and Lancel are in a similar sort of market, whilst Shanghai Tang is a 20 year old clothing and accessories business. Some of these brands are new, some of them are old, accessories and leather goods obviously are affordable luxury. Oh, sorry, forgot shoes, Alaia, named after the Tunisian designer Azzedine Alaia. At Net-A-Porter you can find anything that is branded and is in the luxury space. The Richemont subsidiary touts themselves as The world's premier online luxury fashion destination.


There were rumours earlier in the year that Richemont were looking to sell this business, Bloomberg reported that the business (just the online website) would fetch around 3.4 billion Dollars. Richemont bought out the other shareholders in 2010 (they own 93 percent) for an undisclosed sum, although the WSJ suggested at the time that it was worth 350 million Pounds in total. Which is a lot less than what the business is supposedly now. It is difficult to tell what the annual turnover of this business is, but it is growing like gangbusters. Their call centre fields over 1 million calls a year, their 200 plus call centre agents converse in 23 languages and most importantly (for me) the founder and chairperson, Natalie Massenet is still in charge, to a certain extent. Collectively these "other businesses" made a loss for the year, this is the third loss for this division in a row. Selling other peoples products and high end leather and other accessories is hard work. Selling a very expensive branded necklace and watch, not so much.

The trends are interesting, their own branded stores, i.e. through their own retail channels saw strong growth, up 14 percent in constant exchanges. That means that people wanted to go to the branded stores and buy their products, rather than through the wholesale channels. In other words, if you bought your Cartier in a Cartier store, it counts as a retail sale. A wholesale would be to partners, perhaps wanting to keep stock to a minimum and reflecting some caution in the industry. The other major change to note, and I am sure that this is a conscious thing from the company, is that sales through their retail channels five years ago were 40.7 percent of total sales, in the last financial year that jumped to nearly 55 percent.


This is a global business. China/Hong Kong accounts for 24.1 percent of total sales. Their next biggest country by sales (and this includes everywhere) is the USA, with 11.8 percent of total sales. Japan is next at 8.3 percent of sales and only then France, which comfortably outsells all other European markets, but only represents just shy of 7 percent of all sales. So whilst Europe as a region represents 37 percent of all sales (Asia is bigger), it is fragmented. But the strong growth, if you look over a five year period has continued to come from Asia. Total sales, for Richemont, have more than doubled (up 105 percent) in five years, Asia Pacific has grown by 143 percent. This trend should continue, the crackdown on gifting amongst Chinese government employees has probably put a lid on sales in that region. Currency headwinds from the prior year are likely to unwind and I guess we could see a normalised currency environment, less volatility.


Fine things are enduring. Jewellery and watches, again, the emphasis on not being able to replicate the brands is important. On reading the report, I step away and have the same conviction that this will continue to be a very compelling investment, and one that is a keeper. We continue to keep Richemont on the buy list.