After Richemont predicted a profit plunge that Chairman Johann Rupert deemed unacceptable and Hermes International SCA abandoned a long-standing forecast, the crisis in the global luxury-goods industry deepened.

Richemont, the maker of Cartier jewelry, warned it may have to deepen cost cuts as the first-half operating profit will probably decline about 45 percent. Replacing a target for 8 percent annual sales growth with what it described as “an ambitious goal”, Kelly bag maker Hermes, traditionally among the industry’s most resilient companies, also indicated bad times.

Other luxury stocks were dragged along with the slip in the shares of both the companies. As a drop in tourism after terrorist attacks in France and Belgium, a situation Rupert characterized as a “fiasco” and China’s campaign against extravagant spending, the industry is grappling with another year of waning demand. In the five months through August, Richemont’s revenue missed analysts targets as it slid 13 percent, excluding currency shifts.

“The warnings show that macro and geopolitical uncertainties put near-term volume growth in question. The challenges facing the luxury industry are not over yet,” said Zuzanna Pusz, an analyst at Berenberg.

Even as first-half profit of Hermes beat estimates, it also noted the steepest drop in almost three months as its shares fell as much as 7.7 percent in Paris. As other luxury stocks had stagnated or fallen, the stock had gained 24 percent this year prior to Wednesday. While Swatch Group declined as much as 3.5 percent, Richemont slid as much as 4.6 percent in Zurich.

Hermes Chief Executive Officer Axel Dumas said on a conference call  that the company anticipates earnings will be lower in the second half than the first.

“We have to be frank and transparent, we see first-half results that were better than we expected, but there is a lot of uncertainty around the world and the rigidity of written guidance means we are less flexible,” he said.

Hermes said that its first-half earnings before interest and tax rose to 826.8 million euros ($928 million). According to the median of 12 estimates, analysts predicted 818.5 million euros.

A one-time restructuring charges of about 65 million euros is included in the decline in operating profit for the six months through September, Richemont said but did not explain them. According to estimates compiled on Bloomberg, analysts had expected a 41 percent drop, according to estimates compiled on Bloomberg.

Rupert said at the meeting that the Geneva-based company needs to scale back to adjust to the reduced level of demand and the company has been cutting jobs in watch production at brands including Vacheron Constantin. He said that buying back unsold watch inventory from retailers and store closures “are not the end of it.”

“We have to slim down into the real demand of the market. The world currently has an excess of every manufactured good,” Rupert said.

Richemont said that for the rest of the month, tough business conditions are likely to persist in the industry.

“We are of the view that the current negative environment as a whole is unlikely to reverse in the short term,” the company said.

(Adapted from Bloomberg)

Categories: Economy & Finance