Reuters - Cartier's watches lose their sparkle in China

Cartier's watches lose their sparkle in China

The gold and diamonds of Cartier jewelry are so popular with women that the brand founded in Paris in 1847 is finding it difficult to market watches to men.

The world's biggest jewelry and watch brand in terms of combined sales generates more than two thirds of profits for Swiss parent Richemont, but watch revenues have dwindled relentlessly while jewelry sales have boomed.

Like other high-end watchmakers Cartier is suffering from a drop in demand in big markets such as Hong Kong, mainland China, Russia and the United States. But some of Cartier's problems are specific to the brand, setting up a challenge for Cyrille Vigneron when he takes over the leadership next month.

Improving Cartier's image as a watchmaker in China, where wealthy women love its red boxes but men prefer pure watch brands such as Rolex, Patek Philippe or Vacheron Constantin, may be top of his to-do list.

"Cartier is popular among fashion-focused customers in Hong Kong. Consumers will regard it as a piece of jewelry when they hear the brand, it is particularly popular among ladies," said Lam Tung-hing, general manager of the Hong Kong retail operations of Oriental Watch Holdings Ltd.

"For men, first time luxury watch buyer will choose to buy Rolex, which is practical and good looking."

Cartier and Richemont declined to comment on the brand's strategy to improve watch sales.

Richemont said last month that watch sales were down mid-single digits in the six months to September, dragged down by its biggest markets, Hong Kong and the United States. It had already stated a similar decline for Cartier watches in the full year to March. Shares have fallen over 12 percent this year.

Comparisons with competitors are hard to make. Rolex is privately owned and at LVMH, watch and jewelry sales rose 10 percent during the first nine months but it does not give a separate watch figure. Swatch Group shares have fallen 18 percent, partly due to competition from smartwatches and the drop in demand from China.

Watch exports from Switzerland, where Cartier and other watches are made, fell 3.2 percent during the first ten months of 2015 with shipments to Hong Kong down 22.7 percent and rising just 0.1 percent to the United States.

Pierluigi Fedele, who is responsible for watchmaking at the Swiss union Unia, downplayed any talk of a crisis.

“There is no real crisis in the Swiss watch industry today. Exports are down a bit, but probably still above 20 billion Swiss francs for the whole year,” he said.

NO MORE CHINESE GIFTS

But he noted the subdued Asian market was causing problems for some companies and a few had laid off staff. Cartier said last year it introduced shorter working hours for some employees and would not say if the measure was still in place.

Some analysts estimate that the high-end watch market in mainland China is down 60 percent since its 2012 peak.

This is partly due to the government’s crackdown on the tradition of gifts-for-favors which often involved watches. Richemont also highlighted difficulties in Macau where the casino industry is suffering from the crackdown on corruption, the weak yuan and Chinese government restrictions on travel.

The strong franc has made Swiss exports more expensive while Tiffany & Co forecast a bigger fall in full-year profit than previously expected as a strong dollar kept tourists from spending in its showpiece U.S. stores.

Last month’s terrorist attacks in Paris are also expected to further dent tourists’ travels to Europe to buy luxury goods during the pre-Christmas period which, for some brands, represent up to a quarter of annual sales.

NEW IDEAS

But for Cartier, whose sparkling creations adorned royal heads around the globe in the early 20th century and more recently Kate Middleton's at her wedding to Prince William, the challenges are bigger than for most.

Exane BNP Paribas analyst Luca Solca said Cartier is particularly exposed to China.

“Cartier is facing a relatively subdued luxury market, as the bulk of the other mega-brands. Additionally, Cartier is suffering from the step back in the Chinese watch market / gifting practices. You could argue Cartier has not been the strongest innovator in recent years,” he said.

Lack of innovation has been a problem and Vigneron, who replaces Stanislas de Quercize, a 25-year Richemont group veteran who stepped down last month, will need to focus on this.

Many of Cartier's new watches have been based on existing versions with innovation focused on the most expensive models. In January, Cartier unveiled its first new model in eight years, the Clé watch, but so far only gold models costing more than 10,000 euros are available.

According to a person close to the Richemont group who declined to be named, about 90 percent of buyers of Clé since its launch have been women.

“The way to be successful is, first of all, with product innovation because in a subdued environment that is the way you can maybe get the consumer to buy a new watch," said Bernstein analyst Mario Ortelli.

The company is also a relative newcomer in "in-house" watch movements, the mechanisms that make a watch tick and are beloved of collectors.

When Swatch Group, the world's largest watchmaker, started phasing out delivery of watch movement components to the rest of the industry, competitors were forced to develop their own manufacturing tools, now an important part of the prestige of high-end watches.

Lam says in China Cartier chased the mass market on the mainland and paid less attention to the top technical design required by buyers in Hong Kong.

"Many local collectors will have a question mark as the design appeared as not as good," he said.

MORE SOCCER, LESS POLO

In marketing as well, Cartier could do with a few fresh ideas. While Omega's name is omnipresent at the Olympic Games and each new James Bond movie and Rolex cultivates its image as a sports brand, Cartier relies on its signature panther and other more traditional attributes.

It has sponsored polo for more than 30 years but competitors such as Hublot have been a bit more adventurous by doing deals with soccer teams and ski schools in resorts such as Courchevel.

Richemont thinks Vigneron, a music composer and guitar player who was rehired at Cartier after heading LVMH’s operations in Japan, is the right man to lead Cartier back to growth.

"He is known for thinking out of the box," said one Cartier employee based in London. "I think a lot of people have high hopes for him."

(Macquarie) Global Luxury Goods : Time to price in the New Normal

Slower growth is here to stay
Over the past five years the global luxury goods sector delivered 8% CAGR. We
now expect this to fall to c4% from here due to four headwinds:
1. In HK/China, the anti-corruption campaign and slower GDP growth.
2. Consumer spending growth is anaemic across the EU.
3. Demand growth is softening in the US.
4. Weaker growth in commodity driven markets: Russia, Middle East and Latam
We are very cautious on Watches and expect a decline in Swiss shipments in
FY16 to rebalance HK inventories. The latest KOF survey suggests negative
sentiment for key 4Q. We are also growing slightly more cautious on jewellery.

Shift to a new normal will bring margin pressure
The global luxury goods industry needs c2% organic growth to match cost
inflation and protect margins. Furthermore, we do not believe market appreciates
the increase in operational leverage, a result of 10 years of expansion in retail
distribution. This increase in capital intensity does not show on the balance sheet
but in a significant increase in operating leases: Rent/Sales went from 5% to 8%
FY10 to FY15E. Any sales decline will likely to result in material margin declines.

Key Recommendations: Stick with quality and self help
Negative operating leverage has already manifested in profit warnings in HK
jewellery retailers where we remain negative on Chow Tai Fook (U/P;
PT:HK$4.10). The persistently weak luxury environment means we remain
negative on Prada (U/P; PT:HK$25) and Samsonite (U/P; PT:HK$19.10). We
initiate Richemont with a non-consensus U/P (PT: CHF65), and are similarly
negative on Swatch (U/P; PT: CHF325) as they struggle the most given the
Swiss watch trends. Our EPS is 7%/9% below cons for Richemont/Swatch.

We initiate LVMH as an O/P (PT:€184) as we believe it deserves a meaningful
premium to sector, given its diversity of products/geography and highest FCF
yield of 5% that our Quant analysis identifies as the key driver of returns.

There is nonetheless only one name in Europe which we expect to see earnings
upgrades in FY16: Kering, our top pick (O/P; PT:€198). We believe the market
undervalues: 1) Gucci turnaround; 2) the second phase of Bottega Veneta
growth; and 3) the growing importance of “Other Luxury Brands” where little
disclosure exists. Our EPS is 3%/4% higher than consensus for 2016/17,
respectively. Upgrades and re-rating should deliver 20% upside.

We reiterate our long term O/P ratings on Tiffany (PT:US$103) and Ralph
Lauren (PT:US$155). In 1Q16, we lap the meaningful strength of the US$, which
reduces a key headwind for US companies. For Tiffany, we will start to see the
benefit from lower precious metal costs. Ralph Lauren's restructuring is
proceeding as planned, and we believe it potentially benefits significantly from
the Trans-Pacific Partnership next year.

>>> US Gapping down

Gapping down
In reaction to disappointing earnings/guidance: RAS -25.9%, OUTR -20.3%, UNFI -14.1%, TOL -4.3%, HQY -3%, CASY -2.5%, HRB -1.1%, GWPH -0.9%, HD -0.6%

Select EU financial related names showing weakness: DB -2.5%, ING -2.3%, HSBC -2.3%, SAN -2.1%

Select metals/mining stocks trading lower: MT -7.7%, VALE -7.1%, RIO -6.9%, BBL -6.4%, BHP -5.6%, CLF -4.2%, FCX -3.2%, AKS -2.9%, X -2.8%, AA -2%

Select oil/gas related names showing early weakness: SDRL -11.1%, CHK -4%, KMI -3.9%, PBR -3.7%, MRO -3.6%, RDS.A -2.6%, TOT -2.1%, BP -1.8%

Other news: GEVO -36% (announced a public offering of common stock and warrants), FELP -12.2% (provided update on bondholder litigation; discussions with bondholders and secured credit facility lenders; says 'discussions with the bondholders are unsuccessful, it could result in an adverse judgment being rendered'), KBIO -6.1% (still checking), CMG -4.5% (following report that Several basketball players are sick of E Coli after eating at CMG, CMG issued statement to CNBC said 'safety of customers a priority -Cleveland Circle store temp closed -no evidence yet to suggest e-coli'), VRX -3.6% (mulling a sale of its specialty contact lens manufacturing unit, according to Reuters), QCOM -3.1% (The EU sends two Statements of Objections on exclusivity payments and predatory pricing to Qualcomm), NFLX -3% (likely down with futures), WYNN -2.5% (Gaming stocks weak in HK trade), LVS -2.1% (Gaming stocks weak in HK trade), BABA -1.5% (likely down with futures), M -1.4% (likely down with futures)

Analyst comments: ODP -4.1% (target lowered to $7.50 from $11 at Telsey Advisory Group), PKI -3.9% (downgraded to Sell from Neutral at Goldman ), CG -3% (downgraded to Neutral from Buy at BofA/Merrill), CBOE -1.8% (downgraded to Underweight from Equal Weight at Barclays), APO -1.7% (downgraded to Neutral from Buy at BofA/Merrill), CUK -1.6% (downgraded to Hold at Numis ), IHG -1.3% (downgraded to Hold from Buy at Berenberg)

>>> US Gapping up

Gapping up
In reaction to strong earnings/guidance: ORIG +15.9%, PLCE +8.7%, DRYS +5.5%, ENZ +1.8%

M&A news: FCS +7.8% (acknowledges receipt of an unsolicited proposal to be acquired for $21.70/share in cash, says Board will review and consider the proposal)

Other news: ONTX +43.5% (presents positive data from Phase 2 combination trial of oral Rigosertib and Azacitidine), TXMD +38.7% (announced positive top-line results from its pivotal Phase 3 Rejoice Trial of TX-004HR), ANAD +17.6% (announced end of 'go-shop period'), GLPG +17.4% (announced that its 200 mg filgotinib product has been shown to be effective and safe as once-daily, oral induction treatment in moderate to severe Crohn's disease), PIRS +16.5% (announces research collaboration and license agreement with Roche (RHHBY) in cancer immunotherapy), EFUT +9.5% ( raises active stake to 56.49% (Prior 50.51%)), ICLD +7.8% (commences a review of its strategic alternatives in response to the receipt of multiple unsolicited offers to purchase certain of its key assets), BSI +7.7% (announced that Mega Retail has agreed to sell six supermarket branches to Rami Levi Chain Stores Hashikma Marketing; consideration will be NIS 26 mln), CUR +7.5% reports that NSI-189 molecule data has been published in Molecular Psychiatry), CPXX +7.3% (reports positive data for Vyxeos, showing induced high rates of response in patients with AML), CTRV +6.8% (reports positive results for CMX157; results from head-to-head studies support CMX157's), ZIOP +5% (announced presentation of data from CD19-specific car+ T-cell therapy programs; results demonstrate survival benefit in long-term follow-up infusing autologous genetically modified T cells after hsct), SYN +4.7% (positive topline results from the four week Phase 2 clinical trial of SYN-010 for the treatment of irritable bowel syndrome with constipation), GALE +2.6% (reports final data for its GALE-401 Phase 2 proof-of-concept clinical trial), CSRA +1.8% (awarded an IDIQ contract from the Dept of Homeland Security for support of its Data Center 1), EGRX+1.7% (Eagle Pharma and Teva Pharma announce that the FDA has approved BENDEKA), DBVT +1.3% (announced the initiation of a pivotal Phase III study designed to evaluate the safety and efficacy of Viaskin)

Analyst comments: FEYE +3.3% (upgraded to Buy from Neutral at Citigroup), MESO +2.5% (initiated with a Overweight at JP Morgan), ARES +1% (upgraded to Buy from Neutral at BofA/Merrill)