Richemont Forecasts Profitability Decline as Swiss Franc Surges

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Richemont, the world’s second-largest maker of luxury goods, forecast profitability will drop this year as the surge in the Swiss franc increases the cost to produce timepieces by Jaeger-LeCoultre and IWC Schaffhausen.

The gross margin will be about 65 percent in the 12 months through March 2016, based on the average exchange rate of the past financial year, Chief Financial Officer Gary Saage said at a meeting with analysts viewable on the Geneva-based company’s website Friday. The margin was 66.1 percent last year.

The 15 percent surge in the franc that the Swiss National Bank unleashed when it dropped its cap on the euro-franc exchange rate in January has spurred “belt-tightening” at Richemont, which employs 8,700 people in Switzerland. The company, which makes more than 10 brands of Swiss watches, has frozen salaries in that market and the top three executives have agreed to pay cuts to set an example, said Chairman Johann Rupert, the South African billionaire founder of Richemont.

“We’ve got to get on with life,” he said. “We survived it before and I think we’ll survive it again. Switzerland is still a wonderful place to do business”

Richemont said it can’t shift manufacturing, distribution and head office functions out of Switzerland even as those costs rise in euro terms. So far this financial year, the franc has been on average 17 percent higher against the euro, the currency that Richemont reports in. CFO Saage declined to estimate how the current rates would affect the forecast.

Stock Declines

The stock fell as much as 3.7 percent after Richemont reported an unexpected 8 percent decline in April sales. The median analyst estimate was for 2.8 percent growth in a Bloomberg survey. Retailers delayed purchases ahead of price cuts in markets linked to the U.S. dollar such as Hong Kong.

The shares traded 1.8 percent lower at 85.30 francs as of 11:13 a.m. in Zurich.

The luxury-goods industry is grappling with currency volatility that’s forcing companies to continually adjust prices to try to maintain uniform levels around the world. Richemont said it raised prices in Europe and cut them in markets with dollar-denominated sales. This week, Burberry Group Plc abandoned a forecast for a 50-million-pound ($78 million) benefit from currency shifts that it made just one month ago.

Currency volatility is the biggest headache for timepieces and leather goods, said Mario Ortelli, an analyst at Sanford C. Bernstein.

“Ultra-luxury handbags and watches are particularly vulnerable,” he said. “As price differentials encourage development of grey or parallel markets, companies face pressures to maintain a reasonable price difference to keep this threat in check.”

May Improvement

Orders from retailers improved somewhat in the first two weeks of May, Richemont said. Rupert said April sales shouldn’t be extrapolated to the rest of the year and the company is looking to the future “positively.” He spoke on a call with reporters.

The company, whose full name is Cie. Financiere Richemont SA, will pay a dividend of 1.60 francs a share, exceeding the Bloomberg dividend forecast of 1.40 francs.

Richemont agreed to merge its online fashion retailer Net-a-Porter with Italian rival Yoox SpA in March. The Swiss company will own 50 percent of the combined business, which will be the world’s largest online luxury-goods retailer.

“The goal is to make it the dominant neutral platform for the luxury-goods industry” Rupert said, adding the combined companies still need to be larger. “This is really a big boys’ game, it’s not for the faint of heart.”

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