Wed. Dec 1st, 2021

Time is a luxury that Richemont, like its customers, can afford. This is due to the expensive watches it sells and the control exercised by founder and chairman Johann Rupert.

U.S. activist Third Point has reportedly bought shares in the Swiss luxury conglomerate, which Cartier owns, and is seeking improvements. But Rupert does not have to react quickly to chivvy. A dual-stock structure means it controls more than half of the voting shares despite an economic stake of just 9 percent.

It exposes any criticism of minorities to rhetoric, however well-founded. What investors can complain about is Richemont’s dependence on its jewelry companies, especially Cartier. These brands plus its specialist watches provide almost three-quarters of the revenue and all of its profits. His other businesses are weaker.

This skewed earnings force is a feature of some luxury goods groups. LVMH of France earns most of its coins from its Louis Vuitton leather goods business. It also has a double-class structure for the controlling Arnault family, though not as extreme as that of Richemont.

The focus on jewelry may explain the longer period that Richemont needs to convert inventory and receivables into cash flow. It requires twice as many days as LVMH and Kering, according to S&P Global data. Higher working capital requirements cause a constraint on cash flow.

Graphs showing Richemont shares were behind those of LVMH and Kering until this year;  Richemont's average cash conversion days;  and voting shares of Richemont

All of this, and weaker profit margins than peers, may explain why the share price has lagged behind its peers in recent years, although Richemont began closing that gap in 2021.

What shareholders will want to hear about are Richemont’s other businesses. These burned cash. After the online division took full control of the luxury e-commerce group Yoox Net-a-Porter in 2018 for about € 2.8 billion, the online division suffered losses equivalent to a tenth of divisional sales two years in a row. Discussions on restructuring at YNAP have been going on for some time and the chairman promised changes at the annual general meeting in September.

A clearer plan could come this Friday when Richemont announces the results of the first half. Given Rupert’s control of the group, he has a further luxury: to set out a plan to diversify earnings and express efficiency at a pace that suits his business rather than impatient activists.

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