The Finance Ghost: Poor little Richemont and Pick n Pain

23 Jul 2023

The luxury market made all the headlines in the first few months of the year. LVMH’s share price went to the moon, taking most of the sector with it. Even perennial underperformer Kering is up this year.

Richemont is the JSE-listed opportunity in the luxury market. The products are expensive and so is the share. The market is pricing in growth and defensiveness, with the former coming under scrutiny after the latest trading update.

In the quarter ended June, group-level sales grew impressively by 14% as reported, or 19% at constant exchange rates. As we’ve seen at the likes of Swatch and British luxury stalwart Burberry, the primary driver has been China and the broader Asia Pacific region. Asia-Pacific grew by 32% as reported, or 40% in constant currency.

The problem was in the Americas, with a decline in sales of 4% as reported, or 2% in constant currency. This is now the third-largest region for Richemont, overtaken by Europe, which grew by 10% as reported, or 11% in constant currency.

There are still many question marks about online sales in this space. After all, when buying a timepiece that costs as much as a family home, do you really want it to be a click away instead of immersing yourself in the in-store experience? Online sales were flat year-on-year and that’s even in the omnichannel businesses that also have stores. Pure-play online group Yoox Net-a-Porter (YNAP) saw revenue drop by 8% in constant currency, perhaps just because of the ridiculous name.

Based on the disappointing news from the Americas, Richemont closed 9.5% lower on the day of the announcement.

Pick n Pain?

Yes, everyone needs to buy food. No, everyone doesn’t need to buy cheese and lovely cold meats.

Although grocery is theoretically defensive overall, the reality is that grocery retailers have a cost base that assumes a solid mix of staples and more interesting purchases by consumers. When the latter falls away, so does profitability.

The trading update from Pick n Pay for the 20 weeks ended 16 July indicates that the core grocery business is facing challenges.

Going after the same base of price-conscious consumers, Pick n Pay is finding it difficult to compete with the brand resonance that Checkers has achieved.

Pick n Pay continues to find success in its excellent Clothing business (up by 10.9% in stand-alone stores).

But in the core Pick n Pay South Africa business, sales fell by 0.3%.

The Project Ekuseni programme to improve store performance seems to be working in stores where it has been implemented. It takes a long time and is expensive to execute, and Project Future savings are helping to pay for it. Recent staff restructuring programmes incurred a once-off charge of R250-million for annualised cost savings of R300-million.

Other major once-offs include duplicated supply chain costs during a facility handover (R110-million) and, of course, high incremental energy costs thanks to load shedding (R250-million). The latter, sadly, isn’t a once-off, unless Eskom becomes this year’s Christmas Miracle.

The net result is an expected headline loss for the six months ending in August.

More negative signs in retail

It’s not just grocery retail that is facing pressures at the moment, although load shedding is far worse for fridges than general store lighting. The broader clothing industry is more discretionary than grocery and is competing for a share of wallet from consumers who are spending all their money on food and transport.

Pick n Pay Clothing’s result is not a reflection of the broader market, but rather on how well it has won market share.

Truworths released numbers for the 52 weeks to 2 July 2023. Although the base period had a 53rd week, they’ve given us all the disclosures needed to make them comparable. Kudos to the company for that.

In the first half of the year, Truworths Africa grew by 13.4%. In the second half, that growth slowed dramatically to just 4%, a direct result of consumer pressures and load shedding.

The group-level numbers look better than this because of the performance in the Office business in the UK, with growth in the second half of a whopping 27.1%. That was enough to smooth out the group performance, with full-year growth of 13.2%.

The decision by the SA Reserve Bank to pause interest rate increases will help these retailers, but nothing will help them more than a reduction in load shedding. DM

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.

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Pick n Pain?

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