Richemont’s strong sales in mainland China offset contraction in Hong Kong, Japan

By Michael Shields
FILE PHOTO: Movement plates for watches of Swiss watch manufacturer IWC are seen at its new factory in Schaffhausen

By Michael Shields

ZURICH (Reuters) - Richemont <CFR.S>, the world's second-biggest luxury goods group, reported on Friday a 4% rise in third quarter sales, helped by double-digit growth in China and South Korea, which offset tumbling sales in Hong Kong and Japan.

Shares in the Swiss group rose more than 5% after the results as analysts were encouraged by the performance of its jewellery division and its ability to weather global challenges facing the luxury industry.

Swiss watchmakers are facing a severe decline in their No. 1 market Hong Kong, shaken by pro-democracy protests, while geopolitical tensions in other parts of the world and a profound reshaping of the watch retail network have also weighed.

Richemont, with its high-end IWC and Jaeger-LeCoultre timepieces, is less exposed than peer Swatch Group <UHR.S> to competition from smartwatches, and has up to now been able to offset sluggish luxury watch sales thanks to its strong presence in the fast-growing jewellery category.

Group sales at constant currencies increased 4% and at actual exchange rates 6% in the third quarter of Richemont's fiscal year to 4.16 billion euros (3.54 billion pounds), the group said.

Richemont said sales grew in all regions except Japan, where they fell 7%, hit by lower tourist spending given a strong yen and an October 2019 value-added tax increase which prompted consumers to bring forward purchases to before October.

Vontobel analyst Rene Weber said Richemont's organic growth in the Christmas quarter was slightly above expectations - driven by 6% growth in the jewellery business at constant exchange rates.

"This should also have a positive impact on the group margin as this division is by far the most profitable one (margin 31.5%, group 13.9%)," Weber said in a note to clients. "On the other hand, the loss-making Online Distributors continue to be the problem child with much lower growth than expected."

The integration of online distributors Yoox Net-a-Porter (YNAP) and Watchfinder, bought to boost digital sales takes time and costs money, and rival LVMH's <LVMH.PA> $16.2 billion takeover of U.S. jeweller Tiffany <TIF.N> is seen as a potential threat to Richemont's flagship brand Cartier.

Richemont blamed the lacklustre 2% growth at Online Distributors to "increasingly competitive pricing," as well as a storm near Milan, Italy, that damaged one of the division's warehouse facilities and interrupted business.

Sales in Europe rose 9% in the quarter, benefiting from favourable comparative numbers and strong sales in most markets, Richemont said.

Sales in the Americas rose 5% and by 3% in the Middle East and Africa and the double-digit sales growth in China more than offset a "severe sales contraction in Hong Kong".

(Reporting by Michael Shields and Silke Koltrowitz; Editing by John Miller/Michelle Martin/Susan Fenton)