(Bloomberg)—Richemont Group, No. 17 in the Internet Retailer Europe 500, reported its weakest profit margin in more than a decade, showing how much it’s costing the Swiss luxury-goods maker to push into ecommerce.
Last year’s purchases of luxury online retailers YNAP and Watchfinder have boosted sales, but eroded profitability, the owner of the Cartier and Jaeger-LeCoultre brands said Friday. The operating margin slipped to 13.9%, the lowest in more than a decade.
The online luxury business is going through an unprofitable investment phase as the industry tries to bulk up in the blossoming field and appeal to younger customers. Online rival Farfetch Ltd. plunged 11% Thursday after the ecommerce platform reported a wider-than-expected loss. Richemont spent close to 3 billion euros ($3.4 billion) on its online acquisitions last year as second-hand Patek Philippe and Audemars Piguet watches pop up on Amazon.com Inc. (No. 1) for more than $100,000.
Richemont said its online distributors had an operating loss of 264 million euros ($294.7 million), which Rene Weber, an analyst at Bank Vontobel, called disappointing. The businesses are positive before depreciation and amortization and they aim to remain that way, according to chief financial offer Burkhart Grund.
Richemont has been expanding its Watchfinder second-hand watch business into France, and it had a glitch integrating The Outnet that took nine months to solve, Grund added.
The learning curve has been “steep and painful,” but the lessons from The Outnet will help other sites transition to the new technology and logistics platforms, he said. Mr. Porter, a site for men, is scheduled to complete its shift this summer, and it will take a few years for all of Richemont’s brands to switch to the system.
Watchfinder is also studying other markets to enter. The 17-year-old site already operates in the U.K., the U.S., Hong Kong, Ireland and Australia.
Sales from mainland China rose about 15% last year and growth has been “steady,” said Cyrille Vigneron, head of Cartier. The government has spurred domestic consumption by measures such as reducing value-added tax, he said, adding he expects growth to continue over the mid-term.
These results show how much of a bet Richemont is making on the importance of online sales to the luxury industry. Excluding those units and other one-time costs, operating profit would have increased 13%.
Investors may be disappointed that Richemont didn’t give many more details on YNAP’s joint venture plans with Chinese online retailer Alibaba Group Holding Ltd. The company merely said it’s progressing on schedule and will start up this fiscal year. The venture has picked a CEO, and it’s building the rest of the team and preparing logistics.
Richemont’s watchmaking brands should improve their profitability as they have reduced their dependence on middle-men and managed to keep costs from increasing last year, Grund said. They have spent about 500 million euros buying back unsold inventory over the past years.
Total operating income climbed 5% to 1.94 billion euros ($2.2 billion) in the 12 months through March. Analysts expected 2.05 billion euros ($2.3 billion). The company boosted capital expenditure 70% to 826 million euros last year, and investment needed by the online business means that spending will be 5% to 7% of total sales in coming years, Grund said.