Industry News – Richemont Writes Off 3.4 Billion Euros as Profits Plunge

Richemont, the world’s second-biggest luxury-goods company, has admitted that its strategy of buying up some of the world’s best-known luxury watch brands has been an expensive failure by writing off all of the €3.4bn ($3.9bn) of goodwill on the luxury-goods businesses it has acquired over the last decade.

News of the goodwill write-off, which will cut Richemont’s shareholders funds by 38 per cent, to €5bn, came as the company reported a 46 per cent drop in operating profits, to €259m, for the year to end March 2003.

Johann Rupert, executive chairman, said that the 12 months to March 2003 had proved a “very difficult year” for Richemont whose brands range from Cartier and Van Cleef & Arples jewellery, to Vacheron Constantin watches, Montblanc writing instruments, Lancel leather goods and Alfred Dunhill clothing.

“The fall-out from the heady days seen in the run up to 2000 has been long and severe”, said Mr. Rupert. “The ‘good years’ led to contentment”, and Mr. Rupert, admits that Richemont had been too slow to adjust to the more hostile market environment.

Trading performance in the first two months of the current year has been “poor” with sales running some 27 per cent down on the same period last year. After adjusting for currencies, sales were 19 per cent down, which compares with an increase of 4 per cent in the first two months of the previous year.

Richemont, which had already warned in March that its operating profits would be up to 40 per cent down on the prior year, said that its operating profits fell 32 per cent, to €350m, after stripping out the €91m in restructuring provisions for its watch making operations and also Lancel and Alfred Dunhill retailing units.

Mr Rupert, whose South African family is Richemont’s controlling shareholder, has come under increasing pressure from investors to take a more hands on management role as Richemont’s profits have tumbled and its sales stagnated.

Richemont has emerged as one of the biggest casualties of the sharp slowdown in luxury good spending. Over the past two years its operating profits have fallen nearly two thirds and its operating margin has shrunk from 19.3 per cent to 7 per cent.

Mr. Rupert has already replaced the heads of several of Richemont’s operating businesses, and last month said he would take more day-to-day management responsibilities following the early retirement of Alain Perrin, the group chief executive, who is credited with building up Cartier into the world’s number one jewellery company.

Mr. Rupert said it was “unlikely that we will see a rapid turnaround in the economic climate” and the biggest challenge is to reduce the group’s cost base which had been established at a time when “growth expectations far exceeded what we are currently experiencing”.

However, the effects of poor cost control and problems in individual units, such as Alfred Dunhill and Lancel, have been compounded by Richemont’s SFr3bn ($2.28bn) acquisition of three of the world’s leading watch brands- Jager-LeCoultre, IWC and A.Lange & Sohne, at close to the top of the bull market three year’s ago.

Richemont noted that the elimination of goodwill against shareholders equity is not permitted under International Financial Reporting Standards but it considered the approach to be “fully justified” nonetheless since it was a “straightforward approach” to a complicated problem.

Richemont shares have fallen by more than 15 per cent this year whilst shares of arch-rival LVMH have risen by more than 12 per cent and Tiffany, the New York jewellers, has seen its share price rise by close to 40 per cent.

Richemont shares fell 3 per cent, to SFr20.75 in early trading on Thursday.

Source: Financial Times (UK) – June 5, 2003