Richemont shares fall amid sluggish China demand, margin pressures

Investing.com — Shares of Richemont (SIX:) fell over 6% on Friday following its first-half results, as weak demand from China weighed heavily on the luxury conglomerate’s performance. 

A slowdown in Chinese consumer sentiment led to a 20% drop in sales to Chinese nationals, exacerbating the company’s struggles in its Specialist Watchmakers segment. 

This comes amid broader challenges, including margin pressures and operational headwinds.

Despite strong demand in the U.S. and Europe—key markets that saw double-digit and high-single-digit growth, respectively—the drag from Asia-Pacific, particularly China, was too substantial to offset. 

The Jewellery Maisons division, which includes powerhouse brands like Cartier and Van Cleef & Arpels, posted modest growth in line with market expectations. 

However, the underperformance of the Specialist Watchmakers, coupled with rising costs, led to a 10% miss on EBIT, Citi noted.

The Cartier owner’s EBIT margin fell by 410 basis points year-on-year to 21.9%, missing consensus estimates.

This contraction was due to a combination of gross margin declines and operational expense pressures, some of which were linked to adverse foreign exchange effects. 

“Group opex increases of c.6% were clearly divorced from top-line pressures, which may underwhelm given the cautious planning by CFR already from late 2022 (we suspect some one-off impacts here),” said analysts at Jefferies in a note.

Free cash flow was also under pressure due to a build-up in inventory and lower profitability.

Richemont’s sales trajectory in the region has been more negative compared to its peers in soft luxury, indicating deeper issues in capturing the rebound expected from eased COVID-19 restrictions. 

Citi Research flagged this as a concern, particularly in light of recent speculation about stimulus measures that have yet to translate into tangible benefits for the luxury sector.

The analysts projected further downgrades to full-year consensus forecasts, expecting low-single-digit cuts to sales and mid-single-digit reductions in EBIT estimates. This pessimism reflects a cautious outlook on the pace of demand recovery in Greater China.