Richemont’s strong sales in mainland China offset contraction in Hong Kong, Japan

ZURICH (Reuters) - Richemont CFR.S, the world's second-biggest luxury goods group, reported on Friday a 4% rise in third quarter sales, helped by double-digit growth in China and South Korea, which offset tumbling sales in Hong Kong and Japan.

FILE PHOTO: High jewellery are displayed at luxury goods maker Cartier store on Place Vendome in Paris, France, July 2, 2019. REUTERS/Regis Duvignau/File Photo

Shares in the Swiss group rose more than 5% after the results as analysts were encouraged by the performance of its jewellery division and its ability to weather global challenges facing the luxury industry.

Swiss watchmakers are facing a severe decline in their No. 1 market Hong Kong, shaken by pro-democracy protests, while geopolitical tensions in other parts of the world and a profound reshaping of the watch retail network have also weighed.

Richemont, with its high-end IWC and Jaeger-LeCoultre timepieces, is less exposed than peer Swatch Group UHR.S to competition from smartwatches, and has up to now been able to offset sluggish luxury watch sales thanks to its strong presence in the fast-growing jewellery category.

Group sales at constant currencies increased 4% and at actual exchange rates 6% in the third quarter of Richemont’s fiscal year to 4.16 billion euros (3.54 billion pounds), the group said.

Richemont said sales grew in all regions except Japan, where they fell 7%, hit by lower tourist spending given a strong yen and an October 2019 value-added tax increase which prompted consumers to bring forward purchases to before October.

Vontobel analyst Rene Weber said Richemont’s organic growth in the Christmas quarter was slightly above expectations - driven by 6% growth in the jewellery business at constant exchange rates.

“This should also have a positive impact on the group margin as this division is by far the most profitable one (margin 31.5%, group 13.9%),” Weber said in a note to clients. “On the other hand, the loss-making Online Distributors continue to be the problem child with much lower growth than expected.”

The integration of online distributors Yoox Net-a-Porter (YNAP) and Watchfinder, bought to boost digital sales takes time and costs money, and rival LVMH's LVMH.PA $16.2 billion takeover of U.S. jeweller Tiffany TIF.N is seen as a potential threat to Richemont's flagship brand Cartier.

Richemont blamed the lacklustre 2% growth at Online Distributors to “increasingly competitive pricing,” as well as a storm near Milan, Italy, that damaged one of the division’s warehouse facilities and interrupted business.

Sales in Europe rose 9% in the quarter, benefiting from favourable comparative numbers and strong sales in most markets, Richemont said.

Sales in the Americas rose 5% and by 3% in the Middle East and Africa and the double-digit sales growth in China more than offset a “severe sales contraction in Hong Kong”.

Reporting by Michael Shields and Silke Koltrowitz; Editing by John Miller/Michelle Martin/Susan Fenton