Cape Town - The results of Swiss luxury goods group Richemont [JSE:CFR] for the year ended March 2015 were resilient, despite a difficult situation in Hong Kong and Macau, a demanding basis for comparison in Japan, and the generally volatile economic environment experienced by its customers and retail distribution partners, according to its chair Johann Rupert.
"In such an environment, Richemont’s [divisions] responded well. Excluding the gain realised on the sale of an investment property, operating profit was stable. The jewellery [division] and specialist watchmakers delivered sales growth and broadly maintained their operating margins through successful product launches and, in certain markets, price increases," said Rupert on Friday.
Sales grew by 4% to €10 410m and by 1% at constant exchange rates. According to the group, solid growth in Europe, the Middle East and the Americas was offset by weaker trading in the Asia Pacific region.
Operating profit grew by 10%, including an investment property disposal gain. Profit for the year was down by 35% to €1 334m, primarily due to mark-to-market losses on cash.
The group said there was solid cash flow from operations of €2 387m, and the net cash position of €5 419m was not impacted by mark-to-market losses.
A proposed dividend of CHF1.60 per share was announced. This is an increase of 14%.
Lower precious metal prices and cost containment measures helped mitigate single-digit sales growth and the impact of foreign exchange rate movements.
Key bank impact
A key external event during the year was the Swiss National Bank's decision in January 2015 to end the "peg" of the Swiss franc to the euro. As a consequence, the Swiss franc appreciated against the euro to 1.04.
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"That has had a short-term impact on Richemont during the year under review and has the potential to impact the group on a longer-term basis, depending on how exchange rates develop," said Rupert.
In the short term, the revaluation of the franc against the euro resulted in a loss of about €686m for the group, principally attributable to losses on Richemont’s cash and financial investments.
In addition, foreign exchange forward contracts taken out in line with the established hedging policy of the group also lost value because of the euro’s devaluation.
Overall, exchange losses resulted in the 35% drop in reported net profit for the year.
"Exchange losses in the profit and loss account are compensated by gains recorded in equity in the consolidated balance sheet when those same Swiss franc companies are translated back into euros at the year-end rate," said Rupert.
"In the longer term, we face the question of whether the euro will settle at the current level against the Swiss franc, recover somewhat or potentially weaken further."
Given the extent of the group’s activities in Switzerland, with more than 8 700 employees in manufacturing, distribution and head office functions, the strengthening of the Swiss franc inevitably means that its costs, measured in euros, will rise.
"In line with our competitors in the Swiss luxury watchmaking industry, removing these functions from Switzerland is not an alternative open to Richemont," said Rupert.
"Therefore, we have already implemented certain efficiency measures across the group and are evaluating other courses of action. Where appropriate, retail prices for our Swiss-made products have already been or will in due course be adjusted to reflect the new exchange rate environment."
Business developments
During the year investments in manufacturing facilities and distribution networks were complemented and are now nearing conclusion. These provide state-of-the-art manufacturing facilities to enhance internal production capacity and greater production flexibility.
In March Richemont also announced the planned merger of The Net-A-Porter Group with the YOOX Group, which is expected to be completed in September this year.
"As established business models are disrupted by the technological giants, we believe that it is important to increase scale to protect the uniqueness of the luxury industry," said Rupert.
READ: Richemont combats smartwatch craze with smart straps
Future prospects
Richemont's retail channel grew and significantly outperformed wholesale, where anticipation of worldwide pricing adjustments in May slowed purchases by its wholesale partners. The first two weeks of May, however, indicated some normalisation of the wholesale market.
"We believe that long-term demand for high-quality products will continue to grow around the world," concluded Rupert.
In his view Richemont is well positioned to benefit from an expanding market in the years to come, and he is positive about the group's future.
Reuters reported the pan-European FTSEurofirst 300 Index edged lower in early trading on Friday, with Cartier owner Richemont leading the index lower after reporting lower profits.
Richemont shares fell 3.4% after reporting an 8% drop in April sales at constant exchange rates as well as a lower net profit. It said trading continued to remain difficult in its big markets Hong Kong and Macau.
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