Adverse currency flows increases production costs for Richemont

The second-largest maker of luxury goods has forecast profitability to drop this year as the surge in the Swiss franc increases the cost to produce timepieces by some of Richemont group’s most popular brands.

Now, the Swiss group expects gross margin to come in at about 65 percent in the 12 months to March 2016, based on the average exchange rate of the past financial year, the chief financial officer Gary Saage said at a meeting with analysts on Friday.

The margin was 66.1 percent last year, noted Bloomberg.

Franc surge affects Richemont’s profitability

In this regard, it is noteworthy that the franc has surged by 15 percent due to the Swiss National Bank’s decision to drop its cap on the euro-franc exchange rate. Market insiders now point out that this surge in January has spurred “belt-tightening” at Richemont.

The company, which makes more than 10 brands of Swiss watches, had frozen salaries in that market and the top three executives had agreed to pay cuts to set an example, chairman Johann Rupert, said.

“We’ve got to get on with life,” he said. “We survived it before and I think we’ll survive it again. Switzerland is still a wonderful place to do business.”

However, Richemont said it could not shift manufacturing, distribution and head office functions out of Switzerland even as those costs rose in euro terms.

It is noteworthy that, so far this financial year, the franc has been on average 17 percent higher against the euro, the currency that Richemont reports in.

On the wake of the news, the stock has trading at low, dropping as much as 3.7 percent after Richemont reported an unexpected 8 percent decline in April sales. The median analyst estimate was for 2.8 percent growth in a survey, reported Bloomberg.

Following other luxury goods manufacturers’ path, Richemont said it had raised prices in Europe and cut them in markets with dollar-denominated sales.

Currency volatility was the biggest headache for timepieces and leather goods, Mario Ortelli, an analyst at Sanford C Bernstein, said. “As price differentials encourage development of grey or parallel markets, companies face pressures to maintain a reasonable price difference to keep this threat in check,” Ortelli added.

Orders from retailers had slightly improved in the first two weeks of May, Richemont said. Rupert said April sales should not be extrapolated to the rest of the year and the company was looking to the future “positively”.