When stock prices fall, it is often said that investors have reacted coldly to this or that.

What happened to the price of the Swiss luxury goods group Richemont on Friday was more like a severe coughing fit: the share lost 12 percent in value and was only quoted at 93 francs.

The reason for this was the figures presented for the 2021/22 financial year, which ended at the end of March, and Johann Rupert's very cautious outlook.

The South African billionaire is the chairman and controlling shareholder of the Geneva-based company, which owns jewelry brands such as Cartier and Van Cleef & Arpels, as well as fine watch brands such as Piaget, Jaeger-LeCoultre, IWC and A. Lange & Söhne.

John Knight

Correspondent for politics and economy in Switzerland.

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Richemont increased net profit by 61 percent to 2.1 billion euros compared to the previous year, which was severely affected by the corona pandemic.

However, the group fell well short of the analysts' expectations.

The shutdown of business in Russia as a result of the war, which Richemont consistently refers to as "conflict" in his published announcement, had a financial impact of 168 million euros.

Recently, less than 2 percent of the group's sales came from Russia.

However, rich Russians like to buy expensive things when they travel abroad.

However, this travel activity is now likely to be severely restricted in many cases.

drastic reaction

However, the biggest brake on earnings did not result from the closed shops in Russia, but from valuation losses in connection with the commitment to the online retailer Farfetch.

Richemont wants to work with Farfetch to build an online marketplace for luxury goods that will also offer space for third-party providers.

However, they would have to participate in this common platform.

Apparently, Richemont is having trouble finding partners.

The negotiations are "complicated," according to Geneva.

The failure to come to an agreement with Farfetch is hanging over the stock like the sword of Damocles, says Jean-Philippe Bertschy, an analyst at the Swiss Bank Vontobel.

Nevertheless, Bertschy considers the reaction on the stock exchange to be exaggerated: "Richemont was punished too much by investors." The analyst points out that the group has grown faster than its competitors in both the jewelry business and the watch business.

In fact, sales climbed an impressive 46 percent to a record 19.2 billion euros, with double-digit growth rates in all regions of the world, as Richemont emphasizes.

However, the stock market is all about the future.

And it's darkening in the important Chinese market, which accounts for around 30 percent of Richemont's sales.

China's government-imposed lockdowns in major cities like Shanghai, where most of Richemont's stores are located, are slowing sales.

"In China, there is a threat of a very sharp drop in sales for the year as a whole," warns Bertschy.

According to Richemont CEO Jérôme Lambert, around 100 of the 250 own brand stores in China are currently closed.

Johann Rupert also hit minor tones: "We are facing volatile times." His gut feeling tells him that China's economy will suffer longer than most think, said the Richemont founder in a conference call with journalists.

The economic recovery in the People's Republic will be slower than elsewhere.

Rupert expects a temporary economic contraction in China.

Elsewhere, inflation could lead to political demonstrations and societal polarization that would dampen the "feel good factor" that underlies luxury consumption.

However, the analyst Bertschy does not see further development in China as negatively as Rupert: "Strong Western brands and iconic products are still in great demand there." Business outside of China was also still going very well, especially in Europe and the United States .

Bertschy considers the strong focus on expanding the online business to be exaggerated.

“Customers want to buy expensive jewelry and watches in the shops.

That also applies to the young people, it's about the customer experience.”

The analyst also complains that the group is in danger of getting bogged down with its many different brands.

"Richemont should focus on the strong brands Cartier and Van Cleef and also on the strong watch brands." Overall, the company is in a strong position to benefit from the increasing demand for luxury items.

Bertschy's optimism is reflected in his price target of CHF 160 for the shares.

luxury market is growing

According to estimates by the management consultancy Bain, the market for luxury goods will grow by an average of 7 percent annually up to 2025, to a total of 400 billion euros.

According to a Vontobel study, this is being driven by the massive transfer of wealth to younger generations.

The purchase of luxury goods follows an emotional rather than a rational impulse.

Strong brands are best equipped to master these uncertain times.

The pricing power of a coveted brand is an important success factor.

In fact, a few weeks ago Cartier, for example, promised to raise prices by 3 to 5 percent to offset the increased costs of purchasing raw materials such as diamonds, platinum and gold.

Since Putin's invasion of Ukraine, Richemont has stopped buying diamonds in Russia.