Just a few short decades ago, it was presumed that the Swiss watch industry was dead. The logic was, why would consumers buy expensive, hard to service, and less accurate mechanical timepieces when battery powered electronic ones sell for a fraction of the price and keep better time. Who needs a Swiss watch when just about every microwave can tell you what time it is? Modern technology and the prevalence of electronic devices would make mechanical timepieces obsolete, said the conventional wisdom.
The Swiss Watch Industry has made an impressive comeback. Industry titans Nick Hayek (Swatch) and Johann Rupert (Richemont) are given some of the credit for reviving the industry in its darkest days. The resurgence of the fine Swiss timepiece has something to do with kindling the allure of fine watchmaking tradition, and powerful ad campaigns marrying respective watch brands to exotic pursuits such as racing, aviation, and deep sea diving.
According to data from the Federation of the Swiss Watch Industry, the industry has grown at about 13% YoY since 2009. In 2012, Switzerland exported approximately $22.8B worth of watches. Switzerland is not a high quantity producer, by any means; Yet Swiss made watches command a much higher market price than timepieces made anywhere else.
Total Watch Sales (USD)
Total Units Sold
Average Selling Price
Source: Federation of the Swiss Watch Industry
In any regard, the watchmakers are back and they are making up for lost time (no pun intended). Their business is high margin, and luxury watches often need to be serviced with factory parts and labor, an even higher margin business.
Richemont (OTCPK:CFRUY) is a purer play on fine timepieces than its top competitor in the luxury space, Louis Vuitton Moet Hennessey Holdings (OTCPK:LVMUY) who has further interests in spirits and luxury clothing. Take a look at the brands the "big three" luxury conglomerates own.
Fine Timepieces and Jewelry
Baume & Mercier, Cartier, IWC, Lange Uhren, Jaeger-LeCoultre, Manufacture Roger Dubuis, Montblanc, Officine Panerai, Piaget, Vacheron Constantin, Van Cleef & Arpels
Breguet, Harry Winston, Blancpain, Glashütte Original, Jaquet Droz, Léon Hatot, Omega, "Tiffany & Co. (watches)", High Range, Longines, Rado, Union Glashütte, Middle Range, Tissot, Certina, Mido, Hamilton
Bulgari, Chaumet, De Beers Diamond Jewellers, FRED, Hublot, TAG Heuer, Zenith
Spirits and Alcohol
10 Cane, Ardbeg, Belvedere, Château d'Yquem, Dom Pérignon, Domaine Chandon California, Hennessy, Glenmorangie, Krug, Mercier, Moët & Chandon, Ruinart, Veuve Clicquot
Clothing and Accessories
Alfred Dunhill, Chloe International, Lancel, Maison Azzedine Alaïa, Shanghai Tang, Peter Millar
Céline, Dior, Donna Karan, EDUN, Emilio Pucci, Fendi, Givenchy, Kenzo, Marc Jacobs, Moynat, Loewe, Loro Piana, Nicholas Kirkwood, Thomas Pink, "R. M. Williams"
Now, the numbers.
Data is from June Q End 2013
Net Profit Margin
The 1-year returns have performed nicely even compared to the broader market. Of the big three, Richemont is the top performer.
There is sustainable growth in Asia Pacific and the Middle East, in addition to robust demand from established markets. According to an article by Forbes, China has recently surpassed the U.S. as the hottest market for luxury watches.
The company is determined to preserve the uniqueness of their respective brands. Each brand is run by its own executive team, and management is adamant that won't change, and manufacturing and service won't be centralized. Although this will cost them more as a business, it is a critical step in maintaining the uniqueness and individuality of each brand.
This past quarter Richemont produced a nice amount of FCF, approximately 715M Swiss Francs, and increased its cash position to over 3 billion Swiss Francs. A very healthy balance sheet comprised of 70% equity and negligible long-term debt is icing on the cake.
A value investor will always question the inventory number, as for Richemont it represents approximately $3B. Less FCF and inventory, Richemont is still trading at 23x next year's projected earnings. I think it's fairly valued, and positioned well for growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.