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Profit warning or not, Richemont's still a 'Buy'

An unexpected profit warning by Richemont, the world's second-largest luxury good firm by market capitalization, is a short-term blow but one that is unlikely to dent its long-term outlook, analysts said on Wednesday.

Cartier- and Montblanc-owner Richemont warned on Wednesday that its net profit for the year ending March 31 would fall by 36 percent due to losses on financial instruments that included derivatives.

The news hit Richemont shares, which fell more than 1 percent before recovering some ground.

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Shoppers pass a Cartier luxury store, operated by Cie. Financiere Richemont SA, in the Galeries Lafayette SA luxury department store in Paris, France.
Bloomberg | Bloomberg | Getty Images
Shoppers pass a Cartier luxury store, operated by Cie. Financiere Richemont SA, in the Galeries Lafayette SA luxury department store in Paris, France.

Analysts said the losses at Richemont were probably related to the Swiss franc's sharp rise in January, after the Swiss National Bank abandoned the cap on the franc's value against the euro.

"It's hard not to believe they (Richemont) haven't taken a view on the Swiss franc and that it hasn't bitten them badly," Mike Amey, portfolio manager at Pimco, told CNBC on Wednesday.

The Swiss franc has risen around 3.8 percent against the U.S. dollar since the start of the year and 14.5 percent against the euro.

"Today's announcement (by Richemont) is related to mark-to-market revaluation on financial instruments. The bulk is estimated to be on the currency side, as the euro lowered versus the Swiss franc," Michael Romer, head of equity research, private clients at Bank J. Safra Sarasin, told CNBC.

"As today's mentioned negative items are non-cash, the damage is not that severe, especially since Richemont has a strong balance sheet," he added. "We suggest that the visibility is improving from here and thus maintain our 'Buy' rating."

Also on Wednesday, Swiss pharmaceutical giant Roche said that the strong franc had knocked two percentage points off its sales in the last quarter.

Long-term view

Like Bank J. Safra Sarasin, Citigroup reaffirmed its "Buy" rating on Richemont following the profit warning.

"Richemont remains one of the most attractive EMARP (Emerging Markets at A Reasonable Price) growth stories, in our view," Thomas Chauvet, an analyst at Citi, said in a note. His reasons included: The strength of Richemont's brand portfolio, which includes French fashion house Chloe, Piaget, Jaeger-LeCoultre, Cartier and Montblanc, opportunities in jewellery and retail expansion and a strong balance sheet.

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Richemont said on Wednesday it expected its operating profit for the year to rise 10 percent.

The results came one month after the company said it would sell its online fashion retailer Net-a-Porter to Italy's Yoox in an all-share deal.

Didier Saint-Georges, managing director at asset management firm Carmignac Gestion, told CNBC that as a long-term view, luxury retailers remained attractive because of the growing middle-class affluence in China.

Asia-Pacific is Richemont's biggest market and Hong Kong and China more broadly are key centers in Asia for the sale of luxury goods.

However, high-end retailers such as Richemont and LVMH Moet Hennessy Louis Vuitton have been hurt by the Chinese government's anti-corruption drive and pro-democracy protests in Hong Kong.

"I don't think right now is the time to jump into an opportunity, but if you have a longer-term view and you think China is in the process of putting together a more reliable long-term story, then all this idea about the middle class expanding is a fantastic long-term story for Richemont and LVMH," Saint-Georges said.