Richemont Earnings: Strong Results in Line With Expectations; Fairly Valued in Overvalued Sector

We maintain our fair value estimate for wide-moat Richemont CFR as the company reported a strong set of full-year results. Revenue and profits came practically in line with our estimates. Revenue showed a 19% increase at actual and 14% at constant exchange rates (19.4% and 13.4% in our model, respectively). Operating margin reached 25.2% (25.6% in our model). Remarkably, in the fourth quarter, sales growth accelerated to 22% from 5% in the third quarter and to 27% for Jewellery Maisons, the most profitable and biggest division, at the higher end of industry peers for the same calendar period. We believe Richemont’s strong presence in China and the rest of Asia (Asia excluding Japan accounted for 40% of revenue in fiscal 2022-23), exposure to more-affluent clientele that so far has been insulated from macroeconomic difficulties in the developed markets, and the strength of its jewellery brands, which have been gaining share at a faster pace since the start of the pandemic, should position the company resiliently against peers. Richemont is also one of the few fairly valued names in a largely overvalued luxury sector.

Jewellery Maisons revenue increased 16% at constant exchange rates for the full year, ahead of our 13% forecast, and delivered a 60-basis-point margin improvement to 35%, in line with our estimate. We believe Richemont has been less aggressive than peers with price increases, so growth is to a higher extent volume-driven. Specialist watchmakers division sales grew 13% in revenue and delivered 170 basis points of improvement in operating margin, reaching 19% (12% growth and 19.5% margin in our model). Direct-to-consumer sales also increased in this division to 56%, supporting the pricing and moat of the watch business and helping hedge against overcapacity and discounting risk that the company faced in the past (2015-19).