Betting on Richemont’s Future

GENEVA, Switzerland — Last month, Richemont struck a deal with Chinese e-commerce giant Alibaba to bring Net-a-Porter and Mr Porter onto the Tmall platform, giving the Swiss conglomerate expanded access to the world's fastest-growing luxury market.

This was just the latest in a series of major moves made this year by the group, which is trying to re-configure its stuffy, if still vital, watches and jewellery business to better appeal to a new generation of consumers by doubling down on direct retail, both online and off.

Richemont, which owns several watchmakers including Officine Panerai, Jaeger-LeCoultre and Vacheron Constantin, has been hard at work overhauling its selling strategy for its hard luxury brands, which also include jewellers Cartier, Piaget and Van Cleef & Arpels, focusing on its directly operated retail and pulling back on wholesale partnerships following a €203 million buyback of unsold watches.

Then there was the €2.6 billion it spent to take a majority stake in Yoox Net-a-Porter Group (YNAP) in May, which valued the luxury e-commerce player at €5.3 billion. Just a month later, Richemont also scooped up the UK-based Watchfinder, a leader in the second-hand watch market.

Many of these announcements have resulted in a temporary spike in Richemont's share price, but the company has yet to reap the presumed benefits of these changes. In the first half of fiscal 2019 ending September 2018, Richemont missed analysts’ estimates, generating €6.8 billion ($7.7 billion) in sales with a lower EBIT (earnings before interest and taxes) than expected, thanks in part to a slowdown in sales in China. But some analysts noted that underlying margin performance was stronger overall and that the deals with Alibaba, YNAP and Watchfinder will benefit the group in the long term. On Friday, price-per-share closed at 69.04 CHF ($69.60), down from 73.80 CHF ($73.32) a day earlier.

However, many investors and analysts still don’t think Richemont’s current game plan is enough to materially improve shareholder value. The company’s share price is basically unchanged from five years ago. Over the same period, its greatest rivals, LVMH and Kering, rose 60 percent and 160 percent, respectively.

"Some of the objectives set by [Richemont founder and chairman Johann] Rupert — that the company will be more agile and has more ability to answer to market pressure — are not fully achieved yet," said Mario Ortelli, managing partner at Ortelli & Co. "It's a work in progress."

The company is certainly under pressure from investors to bring more value to shareholders. The pushback is focused on three areas: lack of operating leverage — or the ability to increase profits as revenue increases — the dilution to shareholder value as a result of bringing YNAP into the group and an unclear succession plan.

Richemont has struggled to compete in a market dominated by its larger and more diversified rivals, which have focused on accelerating their soft luxury businesses — prioritising shoes and handbags over diamonds — with good results. Richemont, on the other hand, has struggled to make a business out of soft luxury.

LVMH and Kering have strong leadership baked in for the next decade or two. The next generation of Arnaults are already active in various parts of the LVMH business, and Kering's François-Henri Pinault, 56, is still relatively young. At Richemont, Rupert, 68, recently installed chief operating officer Jerome Lambert as the group's chief executive after nearly two years of experimenting with an unconventional management structure where the board managed by committee.

Rupert’s son, Anton Rupert Jr, joined the board of directors in 2017 and is now a director at Watchfinder. However, analysts are not confident that the younger Rupert, who is only 30, will be ready to succeed his father in the near future.

Some outsiders are advocating for bigger changes, pushing for the group to divest from its soft luxury holdings, which lost the company something like €400 million over the last 10 years, according to analyst estimates. Richemont has taken a few steps down that road. In 2017, it sold the Hong Kong fashion brand Shanghai Tang to Italian entrepreneur Alessandro Bastagli and private equity firm Cassia Investments for an undisclosed sum.

In 2018, Richemont sold Lancel, which it acquired in 1997 for €270 million, to Italian briefcase maker Piquadro in exchange for a share of potential profits earned by Lancel over the next 10 years, up to a maximum of €35 million. In its last fiscal year, Lancel lost €23 million.

The question now is whether Richemont will go even further and sell its remaining labels: Alfred Dunhill, Chloé and Alaïa.

While Dunhill is still struggling to get out from under its image as a dusty British heritage brand, Chloé and Alaïa have enough positive brand sentiment to be attractive to a rival willing to put in the investment to scale them up – resources Richemont has preferred to spend on its watches and jewellery businesses. While Richemont has managed to increase revenue at Alaïa by more than 400 percent in the decade-plus it has owned the Parisian house, sales in 2017 were estimated to be just north of €50 million. What’s more, questions remain around the future of the house given the 2017 passing of its trailblazing founder.

Over the years there have been talks that Richemont would also sell Chloé, the largest and most culturally relevant brand in its fashion portfolio, which analysts estimate generates north of €450 million a year. In 2017, Richemont announced that it would increase its investment in the label upon the arrival of new creative director Natacha Ramsay-Levi, whose ready-to-wear collections have earned accolades from critics. (Group sales of leather goods — which are mostly from Chloé  — increased by 11 percent last year.) But Ramsay-Levi has yet to produce a blockbuster bag or shoe, with styles from predecessor Clare Waight-Keller still lining the shelves.

It would be a masterstroke.

When asked if the company plans to stay in the soft luxury space, a spokesperson told BoF that the appointment of Eric Vallat as chief executive of the fashion and accessories group indicates that Richemont is "fully committed to this business area."

But instead of waiting for the next it bag to hit, it might be worthwhile for Richemont to sell Chloé and Alaïa to another group, such as LVMH or Kering or the London-based Capri Holdings [owners of Michael Kors, Jimmy Choo and Versace], which is on the hunt for more profitable, topline-accretive players with category expertise it currently lacks. Chloé, which sells luxury handbags that are slightly less expensive than many of its competitors, could be worth more than €1 billion to the right buyer.

The longer Richemont's soft-luxury brands languish, the more likely the conglomerate will have to take an even more drastic step. What many analysts predict could very well happen — or should happen — is that Richemont will merge with another group or major brand. While there are several possible partners — from Chanel to Tiffany to LVMH — the most likely one is Kering.

“It would be a masterstroke,” said John Guy, an analyst at Mainfirst. Kering, which has proven its ability to transform luxury fashion and leather-goods brands into modern businesses that generate several billion dollars a year, has struggled with its hard luxury brands. Kering could boost Chloé and Alaïa, while Richemont and its executives would bring hard luxury know-how.

Kering’s pre-existing partnership with YNAP, which powers the back-end of several of its e-commerce sites, would also be beneficial to Richemont as it needs the brands it sells on Net-a-Porter to agree to be sold in China via Tmall. The two companies' current market capitalisation totals about $95 billion combined, meaning that it that wouldn’t be so hopelessly dwarfed by LVMH, which has a market capitalisation near $150 billion.

It's unclear whether Rupert, whose family holds the majority of voting rights but only 9 percent of equity, would agree to such a deal. "The big question is whether the respective controlling families [i.e., Kering and Richemont] would be willing to sacrifice control for the sake of building a stronger, better and more valuable company," Luca Solca, head of luxury goods at Exane BNP Paribas, wrote earlier this year. "This is particularly relevant at Richemont."

There are no indications that Rupert has any interest in letting go of Richemont, and a spokesperson said that the company "does not comment on M&A opportunities." But he is used to letting someone else handle the operational side of things. In the past, Richemont's success was contingent on a “tight management structure” that called for senior executives to oversee the “back of house” — i.e., business and operations — while Rupert, who retired from the role of CEO in 2013, led the “front of house” as a brand steward. (The South African-born executive is also the chairman of investment firm Remgro.) “It worked because those people centrally were competent to manage,” a former executive told BoF in 2017. “You have to know and understand Johann to run the business well.”

To be sure, family-led businesses do not always operate in the way the market would like them to. Some brands, like Versace or Loro Piana, have gone the acquisition route, while others — such as Salvatore Ferragamo and Longchamp — have thus far refused to enter a strategic partnership.

“The decision comes down to Mr. Rupert,” Ortelli said. “He is the one who decides what will be the future of the company.”

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