Revenge Saving: Coronavirus Watch 32

Coronageddon whacked the watch industry but good. The economic downturn’s ongoing effects are dire, especially at the luxury end of the market. The Richemont group – owners of high end horology crown jewels like A. Lange & Söhne, Vacheron, IWC and  Jaeger-leCoultre – is joining its customers in the pandemic practice known as “revenge saving.” Richemont chairman Johann Rupert’s Friday afternoon statement:

Amid the unprecedented effects of the COVID-19 pandemic and the uncertainty surrounding broader economic conditions, the board of directors has decided that it is appropriate to retain an extra liquidity buffer.

To that end, Richemont has halved its annual dividend to CHF 1 per share. Richemont is keeping the cash that would have otherwise gone to investors to protect itself against both the short and long-term effects of the coronavirus catastrophe.

This corporate “revenge saving” reflects Mr. Rupert’s brutally frank assessment in the company’s last financial report: “No-one can say when we will see economic activity normalise.” In case the financial community missed it, Friday’s statement reiterated the point:

Predicting the likely scope and timing of a recovery in demand remains difficult, if not impossible. A surge in Covid-19 cases has forced countries to reverse reopenings and to reimpose restrictions. [ED: true story.]

To assuage investors, Richemont is offering them stock warrants: a chance to buy Richemont stock at a future date at a set price, regardless of the stock price on that date. If Richemont stock is worth more than the set price, ba-bam! If not, damn!

So Richemont gets both the withheld dividend and warrant holders’ cash. They can use the money to keep the ship afloat in this, the worst of all possible worlds. The clock is ticking, and happy hands it ain’t . . .

Due to the prevailing uncertainty, we have decided to set the maturity of the warrants at three years, to capture the potential future upside in the market price of Richemont shares, once all the challenges of the COVID-19 pandemic will have hopefully been overcome.

Hopefully? Is this guy Debbie Downer or what? I’m thinking “what” – as in a responsible financial steward in the midst of an unprecedented crisis.

As opposed to the Swatch Group’s financial team, who took the stage to paint the rosiest of pictures of a post-Coronageddon recovery, without once mentioning revenge saving.

Swatch pointed at China’s pos-COVID-19 economic recovery as the sign of things to come worldwide. Whether or not The People’s Republic of China is a bellwether, Swatch and rest of the luxury watch mob have bet the farm on communism’s wealthiest beneficiaries.

The chart above doesn’t provide the full context of the recovery. COVID-19 has literally trapped Chinese luxury goods buyers in China – locking-up an estimated $111b of sales that would normally have gone overseas (one way or another).

So luxury watch sales up in China, down in Chinese and Asian tourist meccas like London, Paris, New York, Milan and, especially, Macau. Net – net? Not good.

Those sales aren’t coming back. Bain & Co reckons more than half of all Chinese luxury goods purchases will be made domestically by 2025. By that time, they say, China will be the world’s largest luxury goods market.

Maybe not. With the U.S. – China cold war intensifying, with The Coming Collapse of China (no commission on link), imagine what would happen to the luxury watch business if 50 percent or more of its market suddenly went down the tubes?

Meanwhile, there’s a shortage of Swiss watches in China, normally purchased abroad and returned to the mainland. And a shortage of Swiss watch customers everywhere else.

Richemont may not know which way the winds blowing, but they know it’s time to batten down the hatches.

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