Corinne Gretler
RICHEMONT, the second-largest maker of luxury goods, forecasts profitability will drop this year as the surge in the Swiss franc increases the cost to produce timepieces by Jaeger-LeCoultre and IWC Schaffhausen.
The gross margin would be about 65 percent in the 12 months to March 2016, based on the average exchange rate of the past financial year, the chief financial officer Gary Saage said at a meeting with analysts on Friday.
The margin was 66.1 percent last year.
The 15 percent surge in the franc that the Swiss National Bank unleashed when it dropped its cap on the euro-franc exchange rate in January has spurred “belt-tightening” at Richemont, which employs 8 700 people in Switzerland.
The company, which makes more than 10 brands of Swiss watches, had frozen salaries in that market and the top three executives had agreed to pay cuts to set an example, chairman Johann Rupert, the South African billionaire founder of Richemont, said.
“We’ve got to get on with life,” he said. “We survived it before and I think we’ll survive it again. Switzerland is still a wonderful place to do business.”
Richemont said it could not shift manufacturing, distribution and head office functions out of Switzerland even as those costs rose in euro terms.
So far this financial year, the franc has been on average 17 percent higher against the euro, the currency that Richemont reports in.
Saage declined to estimate how the current rates would affect the forecast.
Stock declines
The stock fell as much as 3.7 percent after Richemont reported an unexpected 8 percent decline in April sales. The median analyst estimate was for 2.8 percent growth in a survey.
Retailers delayed purchases ahead of price cuts in markets linked to the US dollar such as Hong Kong.
The luxury-goods industry is grappling with currency volatility that is forcing companies to continually adjust prices to try to maintain uniform levels around the world.
Richemont said it had raised prices in Europe and cut them in markets with dollar-denominated sales.
This week, Burberry Group abandoned a forecast for a £50 million (R919m) benefit from currency shifts that it made just one month ago.
Currency volatility was the biggest headache for timepieces and leather goods, Mario Ortelli, an analyst at Sanford C Bernstein, said.
“Ultra-luxury handbags and watches are particularly vulnerable,” he said.
“As price differentials encourage development of grey or parallel markets, companies face pressures to maintain a reasonable price difference to keep this threat in check,” Ortelli said.
Orders from retailers had improved somewhat in the first two weeks of May, Richemont said. Rupert said April sales should not be extrapolated to the rest of the year and the company was looking to the future “positively”.
The company, whose full name is Compagnie Financière Richemont, will pay a dividend of Sf1.60 (R20.13) a share, exceeding the Bloomberg dividend forecast of Sf1.40.
Richemont agreed to merge its online fashion retailer Net- a-Porter with Italian rival Yoox in March.
The Swiss company will own 50 percent of the combined business, which will be the world’s largest online luxury-goods retailer.
“The goal is to make it the dominant neutral platform for the luxury-goods industry,” Rupert said, adding that the combined companies still needed to be larger. “This is really a big boys’ game, it’s not for the faint of heart.”
Richemont’s shares on the JSE closed 1.43 percent lower at R108.43 on Friday. – Bloomberg