"China/Hong Kong accounts for 24.1 percent of total sales. Their next biggest country by sales (and this includes everywhere) is the USA, with 11.8 percent of total sales. Japan is next at 8.3 percent of sales and only then France, which comfortably outsells all other European markets, but only represents just shy of 7 percent of all sales. So whilst Europe as a region represents 37 percent of all sales (Asia is bigger), it is fragmented. But the strong growth, if you look over a five year period has continued to come from Asia. Total sales, for Richemont, have more than doubled (up 105 percent) in five years, Asia Pacific has grown by 143 percent."
To market, to market to buy a fat pig. Ha, ha, apologies, the ECB meeting announcement is today and not yesterday. But hey, we not really interested in whether the Euro drops 50 bips after the announcement, we are not at that end of the market. Yesterday the Jozi ALSI managed to crack the 50 thousand mark again, and closed within a whisker of that mark. I am sounding obsessive about a number for someone who said that they did not really care. Hey, of course I care, but no level is really key. I wish we rebased back to five thousand points, then the average market commentator would not feel so dizzy anymore.
Across the sea in the US markets were buoyed by better than average economic data, in the form of motor vehicle sales that annualised which were at the best level since 2007, in fact the seasonally adjusted annual rate of 16.7 million represents a 9 percent increase from the previous May. Although it must be said that the last 12 months have produced some volatile numbers in this regard. Perhaps pent up demand after a colder than usual winter (ours arrives later tonight and tomorrow). You would not buy a new car unless you felt safe about your job, your prospects and so on. Also lending a hand in the positive corner was a services read, or the ISM non manufacturing index, which increased to 56.3 for the month of May in the US. New orders and employment moving in the right direction.
Sadly our local manufacturing PMI read on Monday was a shocker, the headline says it all PMI™ continues to tumble, business and employment indices fall sharply. Most worrying was that single line: the employment index fell sharply to 37.2 index points - the lowest level in five years. Yech.
On the same page as the local PMI, OK not nearly as bad, was a softer than expected ADP employment report from the US. But hey, these reports on labour are volatile, especially when you have a civilian labour force of 155.421 million people. That is pretty big. The US civilian noninstitutional population is 247 million strong. The size and scale is mind-blowing. That measure (civilian noninstitutional population) is if you are 16 or older, living in the 50 US states and not a prison, mental facility or home for the aged, or on active duty in the armed forces. That is a bit rude that when you reach your golden years you are thrown into the same category as someone who is incarcerated, don't you think? But I guess that economists are not using emotion here. Anyhows, consensus for the ADP employment report for the month of May expected somewhere in the region of 210 thousand new jobs, the official report printed at 179 thousand number. It seems that the pace of large businesses hiring held the numbers back, small and medium businesses were responsible for hiring. Which is good news.
The beige book, which represents the current economic conditions for the 12 Federal Reserve Districts was also released last evening our time. Moderate and modest were the words used to describe economic activity, with only the Kansas City District showing slower than before economic growth. OK, so all these measures continue to give a slightly mixed picture and that is why I guess there are many people who are not quite believers yet and are determined to see a pull back in the equities market. And those always come.
But if you spend your life out of the market looking for something that does not happen regularly, you miss all of the best gains. Do not predict what is going to happen in the stock market. Speak to real life people and adapt (and more importantly adopt) a view on which company is best placed. Read as widely as you can, read the glossies, make sure you study the annual reports. We love companies, it is what we do, follow the fortunes of businesses and they have a measure, their returns to shareholders. Be that by way of ever increasing earnings that will see the share price rerate accordingly, or a strong dividend flow, or a combination of all of the above, the market pays today what the balance of the buyers and sellers think is the best price. If you don't like that price, then stay away. But to suggest that the price should be at X or Y does in my opinion smack of a little arrogance. You are basically telling the rest of the market that they are dumb.
Talking of annual reports, I saw the Richemont one yesterday, it is available to download: Annual Report. On reading the report it cemented the investment thesis, one cannot underestimate the quality of the brands and the enduring qualities that have been built over centuries. The company is essentially a jewellery manufacturer and seller and a specialist watch manufacturer (nearly 80 percent of sales) and seller. These are devices and pieces that can be kept in your family for generations, I was once reminded by a client who rightfully took objection to a remark that I had made about a fancy watch. Montblanc is not necessarily one of their businesses to worry about, it is less than 7 percent of sales (6.85 percent to be "precise"), but that business has been flat for three years, sales wise. I guess the percentage contribution from a sales perspective will look less in time.
Equally, the rest of the business, which represents 14 percent of total sales and comprises of Net-A-Porter (online), Purdey (shotguns, really!), Peter Millar (high end golf essentials), Chloe (bags and accessories), Dunhill and Lancel are in a similar sort of market, whilst Shanghai Tang is a 20 year old clothing and accessories business. Some of these brands are new, some of them are old, accessories and leather goods obviously are affordable luxury. Oh, sorry, forgot shoes, Alaia, named after the Tunisian designer Azzedine Alaia. At Net-A-Porter you can find anything that is branded and is in the luxury space. The Richemont subsidiary touts themselves as The world's premier online luxury fashion destination.
There were rumours earlier in the year that Richemont were looking to sell this business, Bloomberg reported that the business (just the online website) would fetch around 3.4 billion Dollars. Richemont bought out the other shareholders in 2010 (they own 93 percent) for an undisclosed sum, although the WSJ suggested at the time that it was worth 350 million Pounds in total. Which is a lot less than what the business is supposedly now. It is difficult to tell what the annual turnover of this business is, but it is growing like gangbusters. Their call centre fields over 1 million calls a year, their 200 plus call centre agents converse in 23 languages and most importantly (for me) the founder and chairperson, Natalie Massenet is still in charge, to a certain extent. Collectively these "other businesses" made a loss for the year, this is the third loss for this division in a row. Selling other peoples products and high end leather and other accessories is hard work. Selling a very expensive branded necklace and watch, not so much.
The trends are interesting, their own branded stores, i.e. through their own retail channels saw strong growth, up 14 percent in constant exchanges. That means that people wanted to go to the branded stores and buy their products, rather than through the wholesale channels. In other words, if you bought your Cartier in a Cartier store, it counts as a retail sale. A wholesale would be to partners, perhaps wanting to keep stock to a minimum and reflecting some caution in the industry. The other major change to note, and I am sure that this is a conscious thing from the company, is that sales through their retail channels five years ago were 40.7 percent of total sales, in the last financial year that jumped to nearly 55 percent.
This is a global business. China/Hong Kong accounts for 24.1 percent of total sales. Their next biggest country by sales (and this includes everywhere) is the USA, with 11.8 percent of total sales. Japan is next at 8.3 percent of sales and only then France, which comfortably outsells all other European markets, but only represents just shy of 7 percent of all sales. So whilst Europe as a region represents 37 percent of all sales (Asia is bigger), it is fragmented. But the strong growth, if you look over a five year period has continued to come from Asia. Total sales, for Richemont, have more than doubled (up 105 percent) in five years, Asia Pacific has grown by 143 percent. This trend should continue, the crackdown on gifting amongst Chinese government employees has probably put a lid on sales in that region. Currency headwinds from the prior year are likely to unwind and I guess we could see a normalised currency environment, less volatility.
Fine things are enduring. Jewellery and watches, again, the emphasis on not being able to replicate the brands is important. On reading the report, I step away and have the same conviction that this will continue to be a very compelling investment, and one that is a keeper. We continue to keep Richemont on the buy list.
Home again, home again, jiggety-jog Markets are a little lower here locally, we have not really seen any reaction to the ECB stuff yet. Stand by for later. And then the hyperactivity part of the market is looking for the jobs report tomorrow! Exciting, as ever.
Sasha Naryshkine, Byron Lotter and Michael Treherne
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