Gloom Descends on Luxury-Goods Industry

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The crisis in the global luxury-goods industry deepened after Hermes International SCA abandoned a long-standing forecast and Richemont predicted a profit plunge that Chairman Johann Rupert deemed unacceptable.

Richemont, the maker of Cartier jewelry, said first-half operating profit will probably decline about 45 percent and warned it may have to deepen cost cuts. Kelly bag maker Hermes, traditionally among the industry’s most resilient companies, scrapped a target for 8 percent annual sales growth, replacing it with what it described as “an ambitious goal.”

Shares of both companies slid, dragging other luxury stocks down with them. The industry is grappling with another year of waning demand as China’s campaign against extravagant spending is compounded by a drop in tourism after terrorist attacks in France and Belgium, a situation Rupert characterized as a “fiasco.” Richemont’s revenue slid 13 percent, excluding currency shifts, in the five months through August, missing analysts’ estimates.

“The warnings show that macro and geopolitical uncertainties put near-term volume growth in question,” said Zuzanna Pusz, an analyst at Berenberg. “The challenges facing the luxury industry are not over yet.”

Hermes shares fell as much as 7.7 percent in Paris, the steepest drop in almost three months, even as first-half profit beat estimates. Prior to Wednesday, the stock had gained 24 percent this year as other luxury stocks had stagnated or fallen. Richemont slid as much as 4.6 percent in Zurich, while Swatch Group declined as much as 3.5 percent.

‘Less Flexible’

Hermes anticipates earnings will be lower in the second half than the first, Chief Executive Officer Axel Dumas said on a conference call.

“We have to be frank and transparent, we see first-half results that were better than we expected, but there is a lot of uncertainty around the world and the rigidity of written guidance means we are less flexible,” he said.

First-half earnings before interest and tax rose to 826.8 million euros ($928 million), Hermes said. Analysts predicted 818.5 million euros, according to the median of 12 estimates.

Restructuring Charges

Richemont said the decline in operating profit for the six months through September includes one-time restructuring charges of about 65 million euros, without explaining them. Analysts had expected a 41 percent drop, according to estimates compiled on Bloomberg.

The Geneva-based company, which has been cutting jobs in watch production at brands including Vacheron Constantin, needs to scale back to adjust to the reduced level of demand, Rupert said at the meeting. Store closures and buying back unsold watch inventory from retailers “are not the end of it,” he said.

“We have to slim down into the real demand of the market,” Rupert said. “The world currently has an excess of every manufactured good.”

Tough business conditions are likely to persist for the rest of this month, Richemont said. “We are of the view that the current negative environment as a whole is unlikely to reverse in the short term,” the company said.

Source: Gloom Descends on Luxury-Goods Industry

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