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Mid-Term Analysis: Swatch vs Richemont

What drove the results?
by Robin Lim on June 3, 2018

In a recent report by Bloomberg, it was stated that Swatch Group’s stock performance this year “outshone” its counterpart Compagnie Financière Richemont SA. Up to 23 May, Swatch’s stock prices had jumped 22%, as compared to Richemont’s modest gain of 3.7%.

While both of them are in the same industry, the difference in performance is slightly staggering. For comparison purpose, LVMH Moët Hennessy Louis Vuitton SE – or more commonly known simply as LVMH – gained approximately 27.3% in the same period. It is fair to say that the watch and luxury goods industry is doing fairly well in the current economic climate.

There are several reasons that attribute to the disparity. While the Swatch Group is gaining market share in the watch industry, Richemont is finding ways to rationalise wholesale channels and control inventory. We will be looking in-depth into the reasons behind some of the price action this year.

 

Richemont’s Inventory Buyback

 

Piaget is one of the brands under Richemont that is involved in the inventory buyback programme.

 

In the second half of the financial year in 2018, Richemont had made a whopping inventory buyback worth €203 million. It is noteworthy to also point out that the buyback was much larger than what was initially estimated by JP Morgan, at €150 million. However, on a more positive note, there should not be any large-scale buybacks, as the company had hinted that they are “happy” with the current inventory level.

 

The inventory buyback of Richemont in the last two years.

 

To put this into perspective, the graph above shows the amount of inventory buybacks over the last two financial years. In FY2018, Richemont’s inventory buyback is worth €203 million. This is an approximately 27% decrease from the previous financial year, in which the figure stood at €278 million. In addition, this financial year’s focus for the inventory buyback programme focuses on “specialist watchmakers” division, which includes brands such as Piaget, Baume & Mercier, and IWC. The previous ones were largely led by Cartier.

While the buyback puts a hefty hit on the company’s bottom-line, but the management believes that this is a necessarily evil. The main issue that gripped the conglomerate is the presence of grey dealers – which are secondary markets where unsold goods are offered at a steep discount. Burkhart Grund, the Finance Director of Richemont, remarked that “grey market will (not) help long-term brand equity, so that’s why (they) bought the inventory back”. The same sentiment was shared previously by Jean-Claude Biver, who deemed grey dealers as the “industry’s cancer”.

The €481 million inventory buyback programme had definitely place a dent on Richemont’s resources and bottom-line currently, but we reckon that this is necessary for the long-term. It is certainly hard to build brand equity once it has been diminished, and Richemont surely wants to avoid the situation that some brands are facing with regards to this. However, Richemont could perhaps take a leaf from Swatch’s strategy, where its auto replenishment and control over inventories had insulated them against significant buybacks unlike Richemont. This will be critical for the company, moving forward.

 

The Chinese Factor

 

The top 10 countries that imported Swiss watches in April 2018. Source: Federation of the Swiss Watch Industry

 

In a recent report by the Federation of the Swiss Watch Industry, it was noted that exports of wristwatches in the first four months of 2018 had risen by 11% to CHF 6.7 billion on a year-on-year basis. Some notable statistics include the 43.4% and 11% increase in exports of timepieces to Hong Kong and China respectively, in the month of April.

According to Jon Cox of Kepler Cheuvreux, the Chinese market is one of the key markets for the luxury goods industry. The growth in the appetite for such goods “can last for many, many years”, especially with the rising affluence of the citizens and the fact that they are getting exposed and educated in this sector.

It was also noted from the same report that Swatch Group has more exposure to China and the Chinese than any other European-based consumer company, and that includes Richemont. The combined consumption of timepieces in both Hong Kong and China is almost CHF 400 million in the month of April alone, and that is a very positive statistic for Swatch Group. Based on the annual report figures from Swatch Group, more than 30% of their revenue is from Greater China. Comparatively, while Richemont only provides a breakdown of sales in Asia (excluding Japan), which is around 39.6% of its total revenue. However, the results need to be discounted because (i) specialist watchmakers only constitute 24.7% of its total revenue, and (ii) it includes figures from significantly important markets such as Singapore, Thailand, and South Korea.

 

The Game of Diversity

 

The Sistem51 from Swatch.

 

One of the greatest advantage of Swatch’s portfolio is the diversity in the range of its product offerings.

The Swatch portfolio consists of watches that costs below CHF 100 (Flik Flaks and Swatches), to the entry-level range (Hamilton, Tissot), mid-tier/luxury watches (Longines and Omega) and all the way up to the haute horlogerie level (Breguet and Blancpain). This allows them to cater to the different crowd of consumers, and capturing market share in each tier in the industry. In addition, it also allows them to capture stronger growth during positive economic cycles, while mitigating the impact from an economy downturn.

 

A pair of the new 37mm Saxonia Thin. A. Lange and Söhne is considered one of the top-tier brands under Richemont’s portfolio.

 

On the other hand, Richemont’s portfolio – which is admittedly very impressive with a list of top-tier maisons – is a little too uniform. The entry-level brand in the repertoire begins with Montblanc and Baume & Mercier, before leaping to the likes of Jaeger-LeCoultre and A. Lange & Söhne. From a collector’s standpoint, the list is definitely incredible. However, from the perspective of an investor or a businessman, it might be more prudent to have more diversity in its product line-up. We believe that the recent introduction of Baume – which is a sub-entity of Baume & Mercier – is one of the strategies by Richemont to target consumers who are looking at more modestly priced watches.

 

What the Future Lies: Restructuring of Sales Channels

 

IWC is one of the brands that is available on Net-A-Porter.

 

Earlier this year in March, Richemont announced that they have successfully acquired all of the remaining shares of Yoox Net-A-Porter (also known as YNAP) Group.

 

A screen grab of Net-A-Porter, an e-Commerce platform that is now owned by Richemont.

 

The group, which already had a stake in the Milan-based online e-commerce platform, had offered shareholders a price of €38 per share to takeover the company. This equates to an acquisition cost of around €2.8 billion to buy over all the ordinary shares that the conglomerate have yet to own.

 

Another recent acquisition by Richemont: Watchfinder, a UK-based pre-owned watch dealer.

 

More recently, Richemont had also acquired Watchfinder – a UK-based second-hand watch dealer who has both online and offline presence. The deal was done at an undisclosed fee.

It is interesting to see how Richemont had ventured into different sales channels to expand its reach. The e-Commerce sector is certainly an interesting and exciting field, although more time is needed to evaluate its effectiveness. This is considering the fact that the value of transaction is much higher as compared to items that are typically found on sites such as Alibaba or Wish, and customers might still not feel comfortable to make purchases worth a few grand online. In addition, the customer experience portion is also something that is difficult for online platforms to replicate. However, with the ever-changing trend in consumption patterns, this might turn into an early-mover advantage for Richemont.

 

Concluding Thoughts

 

A snapshot of Richemont’s income statement. Source: Bloomberg

 

While Richemont is lagging behind this year in terms of its stock price performance, but we reckon that there is certainly no cause for alarm. According to Bloomberg, the company posted a 3.1% growth in adjusted revenue to CHF 12.5 billion in FY 2018. This translates to an adjusted net income of CHF 1.47 billion, up 14.9% from last financial year’s CHF 1.28 billion. The financial results are certainly healthy.

We reckon that the new strategies implemented – such as the inventory buyback, e-Commerce channelisation, and diversification of their product range – will create a positive impact in the mid to long-term basis. The appointment of Jérôme Lambert as Richemont’s new Chief Operating Officer late last year is also something that is greatly welcome, considering the tremendous successes that he had with both Montblanc and Jaeger LeCoultre.

However, these are based on the assumption that the economy continues to grow. Given the uncertainty in the current economic climate, there is a chance that such growths and strategies might not hold. Onus is on the companies to come up with different strategies, to target the consumers in the different stages of the economy cycle. It is not an easy task for discretionary goods – but it is certainly a necessity. If not, everything will surely come to naught.

 

The author of this report does not hold a financial interest in the securities of Swatch Group, Compagnie Financière Richemont SA, and LVMH, and he does not receive compensation for this report, nor does have any employment relation with the subject company. The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author to be reliable, but the author does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity, and the author will not be responsible for any financial losses that are derived from any financial investments based on this information that is found in this article. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. 

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1 Comments
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  • Willy
    June 4, 2018 at 12:14 pm

    Makes absolutely no sense to stuff the supply chain with watches no one wants and then buy them back!

    How about learning what buyers want and selling at reasonable (I’d say 60% of list) prices for starters.

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