Summary
- Bluebell Capital Partners involvement - the next catalyst is in a week's time.
- Analyzing Farfetch-Ynap latest deal.
- Valuation is in line with Richemont's historical average on a P/E basis, which is neutral for now.
Over the recent months, our internal team has been analyzing fashion trend performance, and we can clearly state that luxury demand has remained solid in the second quarter despite the uncertainties related to COVID-19 in Greater China. Looking at the fashion companies at an aggregate level, on average big players' revenues beat Wall Street analyst expectations. In particular, the best performances were recorded by LVMH, Prada and Richemont (CFRHF).
For the first time, we will analyze Richemont, the second largest luxury player in the world with a particular focus on jewelry, luxury watches and writing tools. The Swiss giant should not need an introduction, but for readers unfamiliar with the group, Richemont owns brands such as Cartier, IWC, MontBlanc, Van Cleef & Arpels and Chloé. The company engages its activities thanks to the following four divisions:
Richemont at a glance
Source: Richemont At-a-Glance presentation
At a glance, Richemont has a unique portfolio and is a diversified company in terms of revenue by geography and by channel distribution (with almost 2300 mono-brand boutiques around the globe).
Richemont at a glance
Source: Richemont At-a-Glance presentation
Geographically speaking, luxury spending in Europe has benefited from the return of tourists. France and Italy continue to benefit, driven in particular by the Americans who spent +56% on luxury in Europe in June compared to 2019. Performance was also good in the United States, where luxury demand remained solid, with June recovering after a weaker May. In June, China loosened many of its restrictive lockdowns linked to the new pandemic wave. Despite some local outbreaks, the mobility data remains quite resilient and our team expects positive retail sales growth over the next few months.
As far as luxury spending is concerned, we believe that the rate of decline in China has significantly improved since March-May, and the growth will continue further in the course of 2022.
Activist Involvement
An activist fund called Bluebell Capital Partners wants to expand its representation on Richemont's board of directors to influence management decisions. More in detail, the Swiss luxury group is divided into two categories of shares. Bluebell is seeking to designate a representative of the company's A-shareholders and elect Mr. Trapani (ex-Bulgari CEO) to the board of directors. The type A shares of the Swiss holding company in circulation are 522 million and are listed and traded on the Six Swiss Exchange based in Zurich. The B shares are unlisted and are held by Compagnie financière Rupert, named after the group's founding family, who made a fortune with tobacco in South Africa before diversifying into luxury. Johann Rupert, number one of the holding company and president of Richemont, controls 10% of the capital of the Geneva-based company and holds 51% of its voting rights. In addition, Bluebell is requesting another intervention on the statute of the group, changing the minimum number of board members and increasing them to six in order to impose an equal number of representatives for both categories of shareholders.
Concerning the first request, the tug-of-war between Bluebell capital partners and Richemont continues. In a press release , the Group announced that " Mr. Trapani is an inappropriate candidate for election to the Board " due to his past involvement in the LVMH group. Regarding the second point, there will be a Richemont general meeting scheduled for the 7th of September during which they will decide if new members will be added to the board.
Richemont isn't the first major company to come under pressure from the London-based fund. Meanwhile, the sell-side analysts believe that the request is reasonable and in support of the interests of the shareholders.
YNAP Sale
With a communication last week , Richemont decided to sell (at a loss) Yoox Net-a-Porter. The Richemont-Ynap operation was a €2.7 billion takeover bid that dates back to 2018 and had disappointed expectations. Since November, rumors have been circulating about Richemont's willingness to sell a minority stake.
The agreement provides for the sale of 47.5% of Ynap to Farfetch and 3.2% to Symphony Global, one of the investment vehicles of the group headed by Mohamed Alabbar. Ynap will rely on Farfetch for e-commerce operations: fashion and luxury need a mix of physical and digital retail to increase revenues. Looking at the details of when the deal will be completed, Richemont will receive 53-58.5 million of Farfetch class A common stock, which should represent 10-11% of the capital and which, given the performance of Farfetch (the shares have lost more than half of their value compared to the IPO), they will almost certainly not allow Richemont to pay back the investment. Once the initial phase is complete, Ynap will be free from financial debt and Richemont will make available, for a maximum of 10 years, a line of credit for $450 million. The completion of the initial phase of the transaction - expected by 2023 - is subject to antitrust conditions and approvals, while the potential second and final phase requires Farfetch to reach 100% of Ynap's share capital through a put and call option mechanism.
Conclusion and Valuation
As a brief recap, Richemont closed the first quarter of fiscal year 22-23 with a turnover of €5.26 billion (+20% on the same period of 2021) and beating the analyst's estimates who assumed revenues of €5 billion. The company also recorded a broad-based beat going down to the P&L, despite Ynap delivering an operating loss of €210 million in the quarter. In the meantime, the Swiss group is committed to repelling attacks by the activist fund Bluebell Capital and the next catalyst is expected in the second week of September. Concerning the valuation, Richemont's stock price has reached high historical levels after the pandemic and now is back to its historical level at 27x on a P/E basis. On a relative basis, our internal team believes that the valuation is reasonable and the Swiss group is currently trading at a discount compared to LVMH. Based on Richemont's valuation history and based on a forecast P/E of 2023, we derive a target price of CHF 110 and assign a neutral rating.
For further details see:
Richemont: Growth Will Peak In Q3