Poor little Richemont

SA Sunday Times, 11 May 2003

Slack market conditions have hurt the high-end firm, while rivals have performed better. So, has the Rupert company lost the plot? Marcia Klein takes a closer look.

This week's amicable resignation of Alain Dominique Perrin as CEO of Swiss luxury goods group Richemont is widely interpreted as yet another sign of the depth of the company's problems.

Richemont, whose brands include Cartier, Piaget, Montblanc, Dunhill, Jaeger-LeCoultre and Baume & Mercier, has lost over half its market value, to around R57.4-billion, over the last year.

This partly reflects profound unhappiness on the part of shareholders with the warning that operating profit for the year to March would drop by as much as 40%. Details will be revealed next month.

Comparisons with the performances of Richemont's peer group seem to confirm the view that it has lost the plot. Recently its competitor, LVMH, announced a 29% increase in operating profit to just over ? 2-billion for 2002.

But some analysts believe Richemont has been too harshly criticised and that comparisons with other luxury goods groups are limited in the information they yield about Richemont itself.

Profits at LVMH, for example, come largely from its bags, or what analysts refer to as "soft" luxury goods. The trading environment for these goods is substantially better than that in which Richemont's predominantly "hard" luxury goods operate.

One analyst says it is important not to underestimate what Richemont has achieved. "The management skill is still there, it has just been worse affected than others in the sector.

"The size of its distribution is impacting on earnings at this stage," the analyst says, but its business model is based on owning its own distribution.

In a down market, this decision could start looking like a mistake.

The analyst points out that Richemont has built a high cost base while its competitors have trimmed costs down.

However, Richemont does have the ability to finance its costs through strong cash generation, while many others don't.

"Richemont needs to get a tighter handle on its costs, and this is difficult as such costs are a function of the market it is in."

This week the group announced that Perrin, who has been at Cartier and Richemont for over 30 years, will retire as CEO when he turns 61 in October.

He will retain an executive role, with responsibility for strategy and marketing issues.

He leaves to focus on "his other business and cultural issues", which include wine making at his estate, Chateau Lagrezette in Cahors, France, where he has entertained his close friend, UK prime minister Tony Blair.

Executive chairman Johann Rupert was glowing in his praise for Perrin, calling him "Mr Cartier" in acknowledgement of his revitalisation of the brand.

"I cannot speak too highly of the contribution that he has made to the group over the years."

Perrin said the last two years at Richemont have been among his most challenging and exhausting.

His retirement comes at a time when Richemont is under the whip. The London Telegraph last week described the group as "beleaguered" and said its poor trading had put Perrin under severe pressure.

The Telegraph also said Rupert wanted to become more involved in the day-to-day running of the business.

A successor has not been named and it is unclear if Rupert will become the effective CEO as well as executive chairman, at least in the short term.

Richemont has warned shareholders to expect a decline of 40% in operating profit.

It warned that jewellery and watch sales were under pressure due to a decline in consumer confidence. It added that sales and margins would be affected by a significant weakening in the dollar and the yen against the euro, the group's reporting currency.

Steps were taken to restrict operating losses in two areas. It has scaled back Dunhill's retail operations in the US to focus largely on wholesale activities in that market. Steps have been taken to eliminate some loss-making activities in leather company Lancel.

Last year Richemont had sales of euro 3.86-billion and an operating profit of euro 482-million. At the September interim, sales were down 3% to euro 1.78-billion and operating profit dropped 27% to euro 185-million, but earnings per unit were up 5% after euro 270-million in equity-accounted earnings from its 21% share of British American Tobacco.

Richemont will receive euro 60-million from the exercise of warrants or a redemption of preference shares in British American Tobacco. It will show an exceptional gain of euro 300-million in the current financial year.