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Richemont tipped as portfolio ‘crown jewel’

Lex Hall  |  08 May 2019Text size  Decrease  Increase  |  
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Coveted brands such as Cartier and Mont Blanc give Swiss luxury goods titan Richemont superior sales power and investment value, says Morningstar.

Richemont ranks alongside Tiffany, Hermes and LVMH as one of the four luxury goods stocks that carries a Morningstar wide moat – or sustainable competitive advantage.

It is trading at an 18 per cent discount to its fair value estimate of 91 Swiss francs ($127) and presents compelling value, says Morningstar equity analyst Jelena Solokova.

“Richemont’s sales and competitive edge stand to benefit from a shift toward branded jewellery powered by higher brand marketing, female self-purchases, and increasing global incomes,” says Solokova.

“We regard fashion risk as low for the hard luxury goods Richemont sells given their long repurchase cycles and investment values.”

Brand power equals wide moat

Founded by South African businessman Johann Rupert in 1988, Richemont has amassed a stable of 19 brands, including its flagship brand Cartier, which accounts for about 70 per cent of profits.

Jewellery and watch brands comprise more than 80 per cent of sales, but the group is also active in accessories, writing instruments and clothing.

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Its other brands include Van Cleef & Arpels, Vacheron Constantin, Piaget, Jaeger-LeCoultre, IWC Schaffhausen, Lange & Soehne, Officine Panerai, and Montblanc.

Key to Richemont’s wide moat status is the long history and renown of many of its jewellery and watch brands, most of which are more than 100 years old. This in turn helps establish the company’s pricing power and consistently high gross margins of about 70 per cent.

Morningstar's Solokova notes most of the group's brands have "iconic collections" of between 40 and 80 years' duration that have historically commanded significant pricing power.

“Prices north of $5000 for most of Richemont’s watch brands and the prestige value attached to them protect the group’s watch business from the emerging technological disruption,” she says.

Chinese women get taste for luxury

Demand from China is another key factor in Richemont's growth trajectory. While no longer at the giddy rates of the 2000s, China still accounts for about 40 per cent of Richemont’s sales, compared to an industry average of 30 per cent.

“Chinese consumers should remain the biggest demand contributor but grow less than in the past (5.5-6.5 per cent annual growth versus 24 per cent over the past 20 years),” Solokova says.

And the standout among this cohort is wealthy Chinese women, who are catching up to men in the amount they spend on luxury goods.

Affluent women now comprise more than half of Chinese luxury goods buying, versus 30 per cent in 2010, Solokova notes, citing research from global research house IPSOS.

Another driver of Richemont’s performance is the increasing penetration of branded jewellery versus its unbranded counterpart.

Only about 20 per cent of jewellery industry sales is branded, versus 60 per cent for watches and 50 per cent leather goods, says Solokova. But this is changing. Branded jewellery has been gaining share from 10 per cent in 2003.

Away from sales, watches and jewellery are a lucrative asset class of their own.

Jewellery as an investment class delivered a 112 per cent return between 2008 and 2018, according to Knight Frank, a consultancy. Watches returned 73 per cent.

Acquisition raises uncertainty

There are some areas of concern, however. In May last year Richemont acquired Italian retailer Yoox Net-a-Porter in a bid to boost its online sales. YNAP accounts for about 15-20 per cent of consolidated revenues. However, doubts over its prospects forced Morningstar to lift Richemont’s uncertainty rating to high.

And then there is the threat of product innovation. The Swiss watch industry has proved resilient but Solokova doesn’t discount the threat of smartwatches.

That said, Richemont’s specialist watchmaker division’s margins are forecast to increase to high-teens over the next decade from 10 per cent in 2018 and 20 per cent historically.

Slower growth and wealth creation in emerging markets could hurt Richemont’s business growth.

Currency movements are another factor to consider. Solokova notes that increased global pricing transparency driven by the internet means that adjusting pricing for currency movements has become more challenging.

is senior editor for Morningstar Australia

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