Ladies and gentlemen, welcome to the Fiscal Year 2020 Interim Results Presentation Conference Call and Live Webcast for Compagnie Financiere Richemont. I'm Dino, your call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Sophie Canard, Group Corporate Communications Director. Please go ahead.
Thank you, Dino. Good morning. Good morning, everyone. Jerome Lambert, CEO Burkhard Grundt, our CFO James Fraser, our IR Executives and I would like to thank you for joining the audio webcast today to review Richemont's results for the 6 months ended 30 September 2019. We would like to remind you that the company announcement and financial presentation can be downloaded from richemont.com and that the replay of this audio webcast will be available on our website today at 3 pm Geneva time.
Before we begin, may I draw your attention to the disclaimer on our presentation and company announcement regarding forward looking statements as defined in the United States Private Securities Litigation Reform Act of 1995. First, Burkhard will take you through the highlights before reviewing group sales. I will then present some key developments at the Maisons and Online Distributors. Thereafter, Burkhard will walk you through the financials and conclude. This presentation will be followed by a Q and A session.
I will now hand you over to Burkhardt.
Thank you, Sophie. Good morning to everyone listening. Thank you for your time. Before looking at the numbers, let me remind you that Online Distributors results for the prior year period included 5 months of YOOX NET A PORTER Group and 4 months for Watchfinder and Co. With this now clarified, let us look at the numbers.
Sales for the first half of the current fiscal year increased by 9% at actual exchange rates and by 6% at constant exchange rates. Excluding online distributors, sales for the period increased by 5% at actual exchange rates and by 2% at constant exchange rates. Overall, we achieved growth across all regions, distribution channels and business areas at actual exchange rates, led by the Jewellery Maisons and online distributors. We will comment on each of those in more detail later in the presentation. Operating profit increased by 3% to €17,000,000,000 The increase versus the first half of last year reflected higher sales and gross profit, partly offset by higher costs.
Was a positive impact from the adoption of IFRS 16 when taking into account the same parameter of leases in each period. Excluding Online Distributors, operating margin increased by 70 basis points to 21.8%. Profit for the period at €869,000,000 was broadly stable when excluding the prior year period's post tax noncash gain of €1,378,000,000 and the revaluation of the YOOX NET A PORTER shares held prior to buyout. The net cash position was €186,000,000 higher than at September 2018 and now stands at €1,770,000,000 Let me now walk you through the group sales performance, 1st by region, then by distribution channel and finally by product line, with changes versus last year as always expressed in constant currencies. Let us start with Europe, our 2nd largest region with 30% of group sales.
First half sales increased by 7% overall. Excluding online distributors, sales were in line with the prior period. Growth was led by online distributors and the jewelry Maisons. Performances by market were mixed with notable strength in the United Kingdom, our largest market in the region. Retail sales increased by mid single digits on strength from the Jewellery Maisons and Watchfinder's retail stores.
Online retail was strong, partly due to the comparison with last year, where YOOX NET A PORTER and Watchfinder were consolidated for 5 4 months, respectively. The decline in wholesale sales reflected our continued efforts in channel inventory management and optimization of the wholesale network. Let us now move to Asia Pacific, where sales increased by 5% overall and accounted for 37% of the group's total. If we exclude online distributors, sales growth was 4%. China and Korea both have strong double digit increases, partially offsetting declines in China's special administrative regions of Macau and Hong Kong.
The latter with strong double digit sales decline represented 8% of group sales, down from 11% a year ago. All distribution channels enjoyed growth with online retail being particularly notable, albeit from a low base, while retail and wholesale posted single digit growth. By business area, Online Distributors and Julie Maisons outperformed, showing strong growth. Let us now look at the Americas region, where sales overall increased by 6%, supported by strong double digit growth at online distributors and high single digit growth at the fashion and accessories maisons. When excluding online distributors, sales were stable versus the prior year period.
From a distribution channel perspective, online retail posted strong growth and retail sales were in line with the prior year period. The decline in wholesale sales reflected our continued initiatives mentioned earlier. The region contributed 18% to group sales. Let us now turn to Japan, which represented 9% of group sales and increased by 13%, both including and excluding online distributors. Sales were positively impacted by advanced purchases ahead of the October increase in Japan's VAT.
There was double digit growth at the Jewellery Maisons, Specialist Watchmakers and Online Distributors and across all distribution channels. And finally, Middle East and Africa. Representing 6% of group sales in the period, Overall sales were 1% lower than the prior year period and 5% lower when excluding Online Distributors. Double digit growth at Online Distributors was more than offset by declines in other business areas. Unfavorable currency movements compared to the prior year period in wholesale network optimization as well as continued regional and geopolitical uncertainties weighed on sales.
Let us now turn to sales by distribution channel. 1st, the retail channel. Sales in our directly operated boutiques were up by 4% compared with the prior year period. There was growth in almost all regions, led by double digit growth in Japan. Other regions had softer rates of progression, while sales in the Americas were broadly stable.
The positive performance was driven by growth of the Jewellery Maisons and Specialist Watchmakers as well as solid growth from WatFinder's retail network. Retail sales benefited from 37 net store openings in the period, many concentrated in the Asia Pacific region. The contribution of our directly operated boutiques to group sales was 52% overall, in line with the prior year period. 2nd, online retail, which represents sales from YOOX NET A PORTER and the online sales portion of both Watchfinder and the group's Maisons. The current period benefited from a prior year comparison base that included only 5 months of sales for YOOX NET A PORTER and 4 months of sales for Watchfinder.
All regions posted significant growth, in particular in Europe and the Americas. This distribution channel increased its contribution from 14% of group sales a year ago to 17%. 3rd, wholesale. This channel includes sales to franchise partners and to multibrand retail partners. Wholesale sales were 1% below the prior year period as increases in Japan and Asia Pacific were more than offset by declines in the other regions.
As we said during our results presentation in May, our watch wholesale network optimization continued in the first half of this financial year. Wholesale sales stood at 31% of group sales compared to 33% a year ago. And finally, let us move to sales breakdown by product line. Almost all product lines showed growth. Jewelry and watches remained the group's largest product lines, contributing 36% of group sales each, broadly in line with a year ago.
Jewelry sales rose by 4% with growth at both Cartier and Van Cleef and Arpels and in almost all regions. Watch sales equally increased by 4% overall with increases in most regions and mixed performance by Maisons. Clothing and leather goods benefited from the impact of the online distributors. Over to you, Sophie.
Thank you, Burkhard. Let me start with the Jewellery Maisons, which include Cartier and Montelven Arpels. And since 30 September 2019, Pucelati. They reported an 8% increase in sales against strong year on year comparatives. Growth was broad based across channels and regions with particular strength in Asia Pacific and Japan.
Strong increases in China and Korea helped offset the decline in Hong Kong SCR. Offline and online retail growth was spread across all regions, while wholesale growth was less balanced. The Jewellery Maisons operating results were 4% up to €1,200,000,000 Increased investments in store innovations and communication partially offset higher sales and a stable gross margin, resulting in an operating margin of 32.6%, 120 basis points lower than in the first half of last year. Let's just look at the main development over the past 6 months. The successful launch of Clash in April 20 Justine Clou at Cartier and Perlee and Alainbra at Van Cleef and Arpels supported a high single digit jewelry sales growth.
Below double digit increase in watch sales reflected the appeal of Cartier's existing collections, Vertabilis Panter and Santos and of new references for Benoit. Retail growth across regions benefited from newly renovated stores under the latest retail concept at Cartier as well as from 4 net new stores openings. Online retail sales were strong across most markets, most notably in the Americas, albeit from a low base. Wholesale sales showed good growth driven by Asia Pacific and Japan. At the end of period, we completed the acquisition of Boucelotti.
€7,000,000 of acquisition related costs are expensed. Due to the timing of acquisition, Boucelotti has not contributed to group sales or results during the first half. Let us now review our Space Watchmakers business area, which consolidates the results of 8 watchmaisons. Sales rose by 1% with varied performance by region, supported by growth in Japan and to a lesser degree in Asia Pacific, where sales were negatively impacted by a double digit decline in Hong Kong SCR, which was affected by street protests and a relatively strong currency versus the renminbi. Retail sales increased mid single digits, more than offsetting slightly lower wholesale sales.
The decrease in operating results was contained to 1%, reflecting good cost control and improved gross margin from efficiency gains and a larger share of retail. Operating margin as a result was 40 basis points lower at 18.1%. Most Maisons grew with notable performances by L'Enferna, Panerai and Vache Mon Constantain. New references within existing collections such as IWC's pilot watches, Panerai submersible and overseas at Vacheron Constantin have been well received. Retail sales increased across almost all regions, with particularly strong growth in Japan.
There was good momentum in online retail, benefiting from sales through our Maisons' own websites and through the mister Porter and Net A Porter websites. Lower wholesale sales were partly a result on the ongoing prudent channel inventory management and discontinuation of wholesale points of sales. Now let us talk about online distributors, which regroup YOOX NET A PORTER and Watchfinder. Sales of Richemont's Maisons products recorded by YOOX NET A PORTER are shown under both the Maisons respective business areas and online distributors. They are subsequently eliminated under intersegment eliminations.
As Burkhard mentioned, the prior year 6 month period included 5 months of results for YOOX NET A PORTER and 4 months for Watchfinder. Sales increased 32% to €1,200,000,000 On a fully comparable period base, sales increased low double digits with growth being broad based across regions. The operating loss increased to €194,000,000 reflecting a combination of lower gross margin and higher operating expenses. In line with plans, the lower gross margin reflected increased promotion and shipping costs. The higher expenses related to investments in technology and logistics mostly for Mr.
Porter's technology and logistics parts for migration, in marketing and commercial structures and in the international expansion of Watchfinder. In addition, the full 6 months of amortization of intangible assets resulted in an additional €15,000,000 charge compared with the prior year period. Let us look at some developments during the 6 months period under review. At YOOX NET A PORTER, over 200 new brands were introduced. In addition, 90 exclusive capsules were launched across all sites and included Saint Laurent on Net A Porter and Boudinayo to Cinelli on Mr.
Porter. The quality of a personal shopping service was strengthened with the addition of more than 100 personal shoppers and Client Relations Manager at NET A PORTER and Mr. Porter and with the creation of 2 more personal shopping and client relation hubs in the U. S. The net system platform was created to support innovative sustainable fashion and already features 26 brands.
On 30 September 2019, the NET A PORTER flagship stores was launched on Alibaba's Tmall Luxury Pavilion in China and Feng Mao, a joint venture between Alibaba and YOOX Centre A PORTER. At launch, the carefully curated selection amounted to more than 130 designer brands for women and men and 12 rich mausausen. Watchfinder's growth has benefited from international expansion with new operations in France, Germany and Hong Kong SCR. Finally, let us move to the other businesses, which primarily include the group's fashion accessories businesses and its watch component manufacturing activities. Sales were 1% up with a moderate increase in Japan and double digit growth in the Americas.
The increase was broad based in online retail and most markets grew in offline retail. The operating results were positive and the improvement was primarily related to the non recurrence of one time items in the prior year period. Let us look at the developments of some of the Maisons. There was mixed performance across the Maisons with notable growth at Peter Millard. At Montblanc, leather goods sales increased with good performance of large and medium level goods.
Notably, the luggage My 4810 collection displayed here in the slide. Higher retail sales were supported by Montblanc and Daniel, which benefited from new store openings mainly in Asia Pacific. Online retail sales showed a solid increase across regions, most notably in the Americas and in Europe, as our Maisons seek to increase their digital presence. While wholesale sales declined overall, there was double digit growth in the Americas, driven primarily by Peter Millar. I will now hand you back to Burkhard.
Burkhard, over to you.
Thank you, Sophie. Let me walk you through the rest of the P and L, starting with gross profit. Gross profit increased by 8% overall with currencies being broadly neutral. Gross margin was relatively stable at 62.3%, 20 basis points lower than the prior year period, reflecting the dilutive impact of online distributors. Excluding YOOX NET A PORTER and Watchfinder, gross margins improved to 67.6%, an increase of 100 basis points compared with the prior year period.
Let us now look at our net operating expenses, which rose by 10% at actual rates to €3,440,000,000 They included €95,000,000 of amortization of intangible assets on acquisitions, most of which relating to YOOX NET A PORTER. Excluding online distributors, net operating expenses rose by 6% at actual exchange rates. I will now walk you through the expenses by category. Selling and distribution expenses, which accounted for 50% of total operating expenses, rose by 6% at actual exchange rates and by 3% at constant exchange rates, slightly positively impacted by the adoption of IFRS 16. The increase was primarily due to higher depreciation linked to continuing upgrades to distribution networks and to further enhancement of retail and marketing capabilities.
Communication expenses rose by 20% at actual exchange rates or by 17% at constant exchange rates, mainly due to planned initiatives at the Julien Maisons, Specialist Watchmakers and Online Distributors as well as the full 6 months period effect for online distributors. Administration expenses grew by 15% or 13% at constant exchange rates. This growth principally reflected investments in IT, digital initiatives and the inclusion of online distributors for the full 6 month period. Fulfillment expenses increased by 78%, primarily driven by an acceleration of online retail and the full period effect just mentioned. Other expenses amounted to €102,000,000 and included the acquisition related amortization of intangible assets previously mentioned.
Net operating expenses as a percentage of group sales increased from 45.9% a year ago to 46.6%. This leads us to operating profit. The 3% increase in operating profit reflected higher sales and gross profit, partially offset by increases in operating expenses, as just discussed. The operating margin at 15.7% is down by 90 basis points compared to the prior year period. Excluding Online Distributors, operating profit increased by 9% and operating margin by 70 basis points to 21.8%.
Let us now review the P and L items below operating profit, starting with finance costs. Net finance costs for the period amounted to €110,000,000 compared to €47,000,000 in the prior year period. The €63,000,000 increase can be mostly explained by 2 items. First, the first time adoption of IFRS 16 resulted in a lease liability interest expense of €36,000,000 2nd, a €62,000,000 loss was recorded on monetary items, an increase of €24,000,000 compared with the prior year period, mainly due to unfavorable movements in period end exchange rates on our cash position. As a reminder, cash investments are translated at balance sheet closing rates.
Let us now turn to the profit for the period, which decreased to €869,000,000 reflecting the €1,378,000,000 post tax noncash accounting gain on the revaluation of Hugues Net of 40 shares held prior to buyout. Excluding this gain, profit for the period was broadly in line with the prior year period. Following the Swiss tax reform, our effective tax rate amounted to 19%, reflecting the projected rate for the full year. Cash flow generated from operations increased by €455,000,000 to €1,188,000,000 The increase reflects an increased operating profit, the effect of the adoption of IFRS 16 and the positive impact on working capital relating to the non recurrence of prior year inventory buybacks. Let us now turn to our gross capital expenditure, which amounted to €280,000,000 in line with the prior year period.
As a percentage of group sales, it decreased slightly to 3.8% compared with 4.1% in the prior year period. Looking at CapEx by nature, 44% of the gross expenditure was related to points of sale investments, including internal and franchise boutiques. Investments were focused primarily on store openings, renovations and relocations. Notable projects included the new Van Cleef and Arpels store in Dubai Opera Panerai at the Dubai Mall of the Emirates 8 stores at China World in Beijing, including Cartier, Panarai and Chloe Lang and Zun at Deji Plaza in Nanjing the Daniels store at Lee Gardens in Hong Kong SAR and the Roger Dubuyn store in London Newborn Street. Manufacturing investments increased from 7% of the gross capital expenditure to 12%, these being primarily related to research and development activities.
Other investments accounted for the remaining 44%. They primarily reflected investments in €341,000,000 an increase of €33,000,000 compared to the prior year period. The increase mainly reflected higher cash generated from operations, which was partly offset by higher taxes paid. And now on to our balance sheet, which remained very strong, with shareholders' equity accounting for 55% of the total, in line with the prior year period. Net cash decreased to €1,770,000,000 at 30 September 2019 from €2,530,000,000 at 31st March 2019.
The reduction mainly reflected the annual dividend payment, which amounted to €1,020,000,000 and the acquisition of Buccelati. It is now time to wrap up the presentation by reiterating the highlights of the first 6 months of our 2020 financial year. The first half of our twenty twenty financial year was characterized by growth at actual rates across all regions, distribution channels and business areas during these uncertain times. Led by our Jewellery Maisons and online distributors. More specifically, there was strong growth in China, Korea, Japan and the United Kingdom.
The Jewellery Maisons delivered a high level of profitability, bearing in mind, 1st, the significant decrease in Hong Kong SAR, a market heavily exposed to jewelry and watches and second, investments in marketing and communication to consolidate their leadership positions. The specialist watchmakers, equally impacted by the events in Hong Kong SAR, showed good cost control and limited the reduction in operating margin to 40 basis points. They have transitioned from being supply led to demand led and will soon complete their program of discontinuing relationships with unhealthy multibrand retailers. Our fashion and accessories Maisons, grouped under other, registered limited growth and profitability and strengthened their organizations. The online distributors continue to invest in IT and communication in order to succeed in their migration to a new technology platform, finance the international expansion and reinforce market leadership.
These investments led to increased operating losses but will support future growth. Overall, our operating profit grew to €1,160,000,000 reflecting higher sales and gross profit. Growth in expenses was contained, although slightly exceeded sales growth as a result of the investments just mentioned. Excluding online distributors, operating margin progressed from 21.1 percent of sales to 21.8%. We have continued to transform our business model as our organization adapts to an increasingly connected world.
We have progressed well in our new direct approach to communication and client engagement and are now focused on developing our omnichannel proposition. The long term strategic approach we take in everything we do has led us to strengthen our portfolio and expand our reach. 1st, we acquired Buccelotti, the renowned Italian jeweler, to benefit from the major potential of the largely unbranded jewelry market, capitalizing on the group's strength. 2nd, we signed a partnership with a talented and acclaimed designer, Albe Elvas, to form a startup named AZ Fashion. It is too early to share more at this stage, but we are looking forward to seeing this partnership go live.
Watchfinder is another long term investment with a gradual expansion, both the territories it covers and the services it offers. It now operates in 4 markets. We aim for it to become the world's easiest and most trusted place to sell or buy pre owned luxury watches. At Richemont, as our Chairman, Mr. Rupert commented, the agility, creativity and skills of our teams and our strong balance sheet position us well to meet our long term ambitions.
This concludes our presentation. I would like to thank everyone at Richemont for their hard work. We will now open the floor to questions. Thank you.
Thank you, Burkhard. We will start the Q and A session shortly. Before raising your questions, please announce your name and your company name. And also do restrict yourself to 2 questions and not 2 multipart questions. Thank you.
So the floor is now yours.
We will now begin the question and answer session. First question is from John Cox of Kepler. Please go ahead.
Yes. Good morning, Sophie. Good morning, Burkhard.
Good morning, sir.
Two questions for you. Yes, just on the online operating loss in H1, should we be expecting a similar loss in the second half of the year? I think previously you said you want to breakeven there over the next few years. I'm just wondering if you can give us an update on that and whether there's anything one off of nature in H1. And then question on the jewelry products, which seem to slow down quite materially in Q2.
Are you worried about market share loss in jewelry? Or would you say it's really a reflection of what was happening in Hong Kong? Or was there anything else going on in that jewelry product in the second part of your first half in the second quarter?
Yes. Jon, good morning. Burkhard here. Let me try to address your two questions or concerns. First one, online distributors, there's nothing one off in there.
What we're doing, and we've said it many times, is in the middle of several quite significant projects. They are, 1st and foremost, focused on the replatforming, and that requires investment. And that's what has happened in the first half of this year. 2nd, you have seen that we have opened the joint venture with Alibaba, Fingmao, and we have started trading by the end of the first half of this year. So and the third project they're working on is actually preparing the omnichannel proposition, which will enable the Richemont Maisons to transition their operations over to YOOX NET A PORTER.
So these 3 are ongoing. This is investment that is ongoing, and that will continue for the foreseeable future until we're through with that period of intense projects. In addition, they have invested in communication. And in addition, there is also the full period effect of these two businesses that are now in our 6 months numbers. On the full year, no guidance, but this is where we stand.
On the jewelry Maisons, there is 2 things that you must bear in mind. 1, yes, Q2 actually was a strong negative impact from Hong Kong, stronger than in Q1, very clearly. And you know why we all read the news. The second element, that's why we're, I'd say, not too worried about the jewelry business is that there's 2 elements in the jewelry business. There is the jewelry and then there's the high jewelry business.
The jewelry business has continued to motor on as strongly as we've seen in previous years, whereas the seasonal or the seasonal effect of high jewelry will play out more in the second half of this fiscal year. It goes from 1 year to the other. It's it materializes earlier or later in the year. So we're not worried about that. The projections there are quite good as well.
Thank you, John. Next question, please.
Next question from Antoine Beloche, HSBC. Please go ahead.
Yes. Good morning. It's Antoine at HSBC. Two questions. First of all, on yes, good morning.
So on Tiffany, I think 5 or 6 years ago, Rupert give me a hard time when I ask if Richemont could afford seeing Tiffany being acquired by a competitor. So you've been focusing more on smaller acquisition like Boucherlati. So can you say a few words about the potential emergence of a stronger competitor in your key category? My second question relates to the cost. I think you explained the pockets of investment.
Is it possible to say if those investments I mean, there seems to be structural, like not much just H1, but maybe the communication spend could be, I don't know, more weighted towards H1 this year. Any comments or so, a bit more comments about the timing of the renovation of stores? Do you think that the bulk of it was done in H1? Or it seems to be more like a multiyear renovation plan to me, but any insight there?
Thank you, Antoine.
Listen, Antoine, if our Chairman has given you a hard time on Tiffany, I could refer you back to him and ask you to ask him that question. Joke aside, we focus on clearly is our Maisons, the names we have in that space. And I think we have 3 of the best assets in or Maisons brands in the jewelry space who have very strong leadership positions there. And just look at what we did with VonCleef over the last 15 years. I think they have we have shown with Van Cleef that we are able to turn a very small Maison into an industry leader.
And I think Cartier the evolution of Cartier over the last 10, 15 years also speaks to that. Pucelati is another very strong asset, by the way. It's something that or a Maison, which is with its distinctive style and heritage, is very complementary to the portfolio we have. So we clearly focus on the Maisons that are part of Richemont that make absolute sense for us because they are luxury Maisons, and we do not entertain these thoughts. 2nd, you were talking about the timing of expenses.
Nothing really to call out here. Online distributors, the investments we're calling out here is continued effort. We've always said that midterm, we want to progress to EBITDA or to EBIT neutral position. We're on track for that. These investments were planned.
These investments were executed as planned. And we're on track to deliver on the technological side, if we talk about the online distributors, what we had planned for. Marketing spend, yes, but that is okay. This was stronger in the first half of the year, but nothing special to call out around that. It depends on the plans of the Maisons and the way they have structured their fiscal year.
So nothing I would call out here. This is as planned.
Okay. I mean just maybe on communication, just to make sure I understand, it was planned, but does it mean that over the full year, we could see a similar increase in the communications to sales ratio?
Well, if you talk from 9.1% to 9.2%, that's a massive increase of the ratio on sales. I would not agree with that. But Antoine, that we don't guide on the full year. So it is what it is.
The next question is from Rogerio Fujimori of RBC.
Hi, Barker. Hi, Sophie.
Hi, Rogerio.
Questions, please. Hello. Hi. First on Specialist Watchmakers, the division has gone through 2 years of transition. So how should we think about, I think, wholesale rationalization, trade stock levels and sell in versus sell out in the second half?
So this is my first question. And the second question on the YNAB Alibaba JV that just went live. Should we expect a material incremental sales contribution in the second half? And what are the next steps for the JV and potential investments required? Thank you.
Good morning. Jean Lambert speaking. So when it comes to the specialist watchmaker, you indeed mentioned that the category has been focusing a lot on Trudomon. You will remember that we proceed to important buyback a few years ago, primarily with Cartier and then with SWV. Since when and since the start of the year, we have been monitoring very closely our sell in and sell out.
We can say again today that our sell out is superior to our sell in, which is showing the commitment and the discipline that the category has in developing that new business model. It's also proven by the growth in retail that the category has been registering during that period. When it comes to that the distribution and the quality of the distribution, the category has been reducing the number of wholesale door quite significantly over the period in certain market. Surely, we came slowly to the end of that reduction. When it comes to Fing Maers, thank you for your question.
Indeed, a very important part of the agenda. I'm sure you noticed that it was only 12 months ago that Alibaba, YOOX NET A PORTER Richemont launch a project. And you know that we are trading now for one good month. The results are very promising. And I cannot disclose, you can imagine any direct number.
I can just refer to the quality of the service. It's already reached 4.9 out of 5 rating service rating ratio. Now the team is fully working on their 11:11 single day and it will become more and more a real active part of our business. Thank you.
Thank you.
Next question, please.
The next question is from Edouard Aubin of Morgan Stanley. Please go ahead.
Yes. Good morning. Edouard, Morgan Stanley. So just two questions for me as well. Just to follow-up, sorry, on Specialty Watchmaker.
So we talked about the top line, but just to come back on the bottom line. So I guess if we exclude the impact of the inventory provision you had last year, your profits are down about 10%, 11%, I think, in year over year in the first half. So there's been some talks in on the Jiva blobs about some cost cutting activity initiatives launched by Richemont in the second half. So I know, Brookhaven, you don't give guidance, just a theoretical sensitivity. If sales were to more or less remain the same in the second half versus would the deleverage be relatively similar in percentage terms?
Or would that be offset by some of the proactive initiatives you're taking on costs? And my second question relates to IFRS 16. Is it fair to assume that the impact on EBIT in the first half was around a positive around €50,000,000 to €60,000,000 And if so, how can if you could give us a rough split by division in terms of impact, that would be quite helpful. Thank you.
Thank you, Edouard. Edouard, good morning. So Specialist Watchmakers, listen, very simple. We don't we wouldn't comment on blogs or on media speculation because what we do running our businesses, what is internal remains internal. And I want to put that out in the public space.
What I can say, and I refer what to what we have been saying, what I have been saying for quite a while now, is that the Specialist Watchmakers, the operator contribution, you know the numbers, has dipped below 8% or below 9%. And we said we are on a midterm trend to rebuild operating contribution, to rebuild profitability. This is the plan for this year once again. And now I would not read too much into H1. H1 is a snapshot we take after 6 months.
We don't manage the business for a half year result or a full year result, okay? And investments are spread out through the year the way they are spread out through the year. We've touched on communication expenses for the first half for the group. This has also played out like this at the Specialist Watchmakers. So I would not read too much into it.
What I have said before, what I have said in May is that Specialist Watchmakers retail sales are expanding. The wholesale sales are still consolidating because we make them consolidate because, as Jerome mentioned, we are still in the process and we're winding down of closing control. And that is the plan that has played out very well last year. This is the plan that still is in place for this current fiscal year. IFRS 16, yes, I think you're right with your numbers.
I won't comment on the divisions, but if you just look at the and I think it's very clear. If you look at the spread out of the assets or the right of use assets, Obviously, the Jewellery Maisons, followed by Montblanc, followed by YOOX NET A PORTER have the biggest portion of the right of use assets and thus the remaining slightly positive impact on the operating contribution. And then it's followed by Specialist Watchmakers, F and A Maisons and then the Richemont assets or Richemont structure related assets and leases. So it goes pretty much in line with where we have deployed the capital. It's on a division by division level, not really material if you at the overall
numbers. The
next question is from Melanie Flauquet of JPMorgan.
Taking my two questions. So the first one is regarding the jewelry product category, not jewelry by division, but by product category. If I look back, it sounds like this product category has actually decelerated for 12 months. I know that there is volatility in the high end of jewelry on a quarterly basis and on a monthly basis. But for 12 months, we're now on mid single digit against strong double digit previously.
Can you tell us what is happening to the division in comparison to other winning to the, sorry, product category in comparison to other winning product categories in Luxury, for instance, we are not seeing this kind of deceleration in trend in leather goods. So I was wondering whether you share with us what you think is happening there in the last 12 months. And actually, as a backup to that, we've what is that attributed to as well in your view? So that's my first question. The second question That's
the first question. That was already 2 questions, Melania.
But it's all about jewelry. The second is not shorter. It's about your release says that your gross margin expanded at the group level because of a product mix positive impact. I am not seeing this in the gross margin of Curie Maisons, which is actually flat. So I was wondering whether you mentioned divisional positive impact or what did you mean by product mix impact?
So let me walk through your 3 or 4 questions here. Well, A, I'm not going to compare jewelry development to leather goods because I don't really see the bridge here. If you look at our numbers, if you look at the Maisons side, meaning excluding the online distributors, right, the jewelry growth is at 7% at actual rates, and the leather goods at 2% at actual rates. So I'd say jewelry is still taking a lead here. If you look at the total group, the picture is slightly different because you have the trading through the online distributors.
Now the jewelry category, it's a simple one here. The jewelry has continued to expand very strongly, and the high jewelry invoicing will happen in the second half of the year. So that's where we see the difference or the what you take as a slowdown in the growth rate. So that is, in a nutshell, the way we view the world. We're pretty happy about the jewelry expansion, and we're pretty positive about the high jewelry expansion coming in the second year of the second half of the year.
On top of that, yes, we have had in Q2, clearly much stronger than in Q1, the impact of Hong Kong. Hong Kong is a market for us which is very strongly exposed to jewelry and to watches. And that obviously has hit us in Q2 much stronger than in Q1. I think Q1, we flagged out that the market was down by about 10 percentage points, something like that. And then in Q2, the drop was quite severe in a very short period of time.
And then the gross margin?
What was the question on the gross margin?
Product mix impact, given that the gross margin is relatively flat at Jewellery Maisons.
Well, I can't go into those details because it's between that would mean I would call out the development at Cartier and the development at Van Cleef. So I can't really go into that level of detail.
Well, I'm sorry. I'm trying to understand the release. You talked about the product mix positive impact in your margin, which is on an underlying basis expanding. Yet I can't see it in the jury Maisons. So you don't need to expand.
It's not visible in the Jewellery Maisons. Something else is happening
on the world. It might come from a
It could have been divisional mix.
Then it might come from a different division, in this case, from the Specialist Watchmakers.
But is it a product mix or it's rather a divisional mix impact because indeed, your resume is higher gross margin and expanded faster. So is this just a wording that wasn't quite right? Or is Specialist Watch is at a huge extension?
Well, Specialist Watchmakers, by definition, is watches. So that is where the expansion of the gross margin has come from. So you might call it a product mix or you might call it a business area mix. But in this case, it's the same. Okay.
No, that's useful.
Specialist Watchmakers business area obviously coming from watches.
Okay. That's just all.
So that was a confusion, then I hope it's cleared up now.
Thank you.
Next question, please.
The next question is from Thomas Chauvet of Citi. Please go ahead.
Good morning, Sophie and Borchardt. Two questions for me, please. The first one for Borchardt. Were you surprised by the 100 and 20 bps margin pressure in the jewelry Maisons? How much do you attribute to the rising costs of doing business in branded jewelry?
So competitive segment versus maybe some exceptional factor this half, the revenue slowdown in a high margin markets like Hong Kong, you mentioned it, the step up in store innovation, the sharp increase in events within that marketing? And secondly, a question for Jerome Lambert on the fashion accessories Maisons. Many changes there at the same time, you took over the division recently following the departure of Eric Vala, the JV with Albert Albaas, you reorganized manufacturing last year in Italy, relaunched handbags at Cartier, changed the CEO of Chloe, etcetera, etcetera. I know it's been the same question for the last 15 years, but do you really believe in your ability to succeed in fashion? What is different this time?
Can you generate strong returns with that portfolio of brand in what is undoubtedly an attractive segment of the luxury market? Thank you. Okay.
Let me start with the jewelry Maisons. Are we surprised? Yes and no. We're surprised, obviously, by the Hong Kong development, I think, as the rest of the industry and even across other industries. Of course, we are surprised about that.
And as you know, this is one of our most profitable markets because demand is very concentrated. We have a good network of boutiques there, but we don't have a huge territory to cover. So from a cost benefit relationship, that's a very positive and structurally strongly profitable market. And that demand is now or has shifted partly to mainland China, to Korea, to other tourist destinations. So yes, that fall and that severity, probably the fall has surprised us to a certain degree.
The rest, I'd say, of the activities in the jewelry segment is not surprising for us because it was planned as such. The and we've referred to that in the past. The Jewellery Maisons generate a very high level of profitability of operating contribution and a high level of cash contribution. And these are very big businesses, as you know. No.
They are leading brands in their space, and we've added what we believe can be against the background of its heritage, etcetera, and its strong designs can be, in the future, one of the leading brands. We've added that brand, Bouygiletti. So and the and we've almost always said, well, these are businesses in which we continue to invest so that we can keep their leadership position. Cartier, as we said, is in a multiyear investment phase into the retail network. So they're in the middle of that.
They have we have on the Juli Maisons side also invested in communication in the first half of the year. So none of that comes as a surprise to us. Just another word on that. We don't manage 4 quarters or half year results or even full year results. We try to focus on the long term across business years or business periods.
So this is a snapshot at 30th September. We don't manage for 30th September. So investments have been deployed into the Maisons in the jewelry space in the first half of the year. And over the years, we'll continue to do so because the contribution is still very high, as you can see.
Yes. Thank you for your question for fashion and accessory activity, which is embedded into the other category. Just and as it is embedded in the other category, sometimes it doesn't give all the time the capability to read completely the numbers. But if I would take the last 5 years of that category evolution for the Maisons that are still in the portfolio, say growth rate will be at least at the rate of the rest of the group. So in terms of absolute performance, maybe not enough, but at least there's not being a source of decreasing as a top line performance of the groups there.
Maison like Clouer has been more than doubling its turnover in less than 5 years. The Maison like Peter Miller in the US has been very significantly growing over that period and having a very high growth rate during the 1st semester. So there are some very interesting success in that category as mentioned during the presentation. The change that you mentioned are indeed on top of that are very source of positive evolution of our business and was also meant to be necessary. We have appointed a new CEO for Alaya with Miriam Serrano.
We have a new CEO at Chloe with Ricardo Bellini. Ricardo being a strong professional of the branch, been working here at Margiela and Diesel during the last part of the period and we know that having professional in this Maisons is a key element of success. What changed on top of that is that also one good year ago, the link between YNAP and the rest our activity has been further reinforced. And we believe that working closer with YNAP will further help, particularly in the perspective of China, where with the launch of our JV or Figma, we can build a strong bridge into strong points of success for the future in Luxury Digital Distribution.
Next question is from Luca Solca of Bernstein. Please go ahead.
Hello Luca. Good morning to you.
Yes. Hello. Good morning. A question on strategy. Could you help us understand the strategic goals you have in the secondhand business?
And how do you see this develop over the next 3 to 5 years? Your investment in Watchfinder seems to indicate that you have a toe in the water there. And I wonder what opportunities and how you would expect to scale this business at the group level? I have a similar question on the acquisition of Buccelati. I'm not sure whether you stated and sized your ambitions in this case.
If the answer is no, I would like to ask a reserve question, if I may.
Okay. Yes. Thank you for your question on circular economy. Indeed, we do believe that circular economy is important in the luxury landscape. For Watchfinder itself, you know Watchfinder being the leader of secondhand, which is in the UK, excellent in its organization, excellent in its development and it's very already omni channel organization with a superb combination between the website, the showrooms and the boutique.
Since June, we started the internationalization of Watchfinder. So we took the company first to France and then here we see a real success. So that's largely over our expectation. Then we have opened Hong Kong in August, Germany in October, Switzerland is about to open now in the month of November, and then we'll go to another continent over next year. And then our proof of concept was France And here we see it's so far only the digital activity.
We have not yet launched the other frame of activity in showrooms and boutique to complete that. But already the localizer digital activity is very strong. We see here, so a very interesting development of the business of the business itself, because that's how it developed through the internationalization. We don't see how or why, if it has been so successful in UK, it cannot be repeated elsewhere. And then we see as well very interesting combination with our core watch business, as it extend new services or new potential of services for Maisons.
And there as well, we are launching proof of concept to check and to see how it can combine with retail activities. But that's indeed very promising. And then we do believe that it is part of in the future the so called watch business.
Yes. Question on Boucherlotti. Listen, let me just put it like this. If you look at the Cartier, if you look at Van Cleef and Arpels and then if you look at Boucherlati, you would I hope you would agree that it's a very natural addition to the other 2 Jewellery Maisons because it has very strong heritage, very strong patrimony and very distinctive style. And it's also positioned at the high end of the jewelry business.
So this is something that is very close to our core competence, I would say. And this is something where we see a very clearly deliminated playing field in jewelry, in this jewelry space, and we're very happy with that acquisition. Now we have not spelled out any ambitions. Internally, we do, but we have not put that to the market. So that means you have a follow-up question.
Wonderful. Thank you so much.
There's a follow-up question, Luca.
Yes. Thank you very much for the bonus question. I was curious to get a bit more color on some of the brands that you haven't mentioned within the specialty watchmakers, Jaeger LeCoultre and the impact of the Polaris new products, Aubon Mercier. And I also noticed that you had one winner in the Grand Prix de la Rolangerie Generre that was carried out this week out of 18 awards that were given and Parachon Constantin been beat won that. Are you happy with the profile you're having in the watches business?
Or would you want to have a more prominent role in this area in terms of innovation and ability to capture the scene?
That's a good follow-up question to Boucherlotti.
Yes. Thank you, Luca. We said, indeed, if you want to extend your collection in terms of watches, there are still a lot of very interesting watches to see right now. You probably saw that Lange and Sohne just introduced his first still watch, which is a very, very interesting in term of offer. You know that in Grand Prix Geneva, Richemont is not present with all the Maisons and that in Grand Prix, if I'm not wrong, either Rolex or Patek are present, for example.
So I guess you can draw somehow some conclusion out of there. No, no. If you see the models that have been launched with the Speedfire at LVC, if you see the new Odyssey at Lange and Zener, if you see the newer diving watches in Panerais, they are all showing that success of this Maisons being very connected to recent new lines launch or extension. All that done in a very reasonable way because you have also noticed that the assortment are more focused than before. And then that the Maisons are very consistent in managing the rhythm of innovation and there are carryover collection.
The success of the global of the watch Maisons, if you read it in, I would say, again the trend of Hong Kong is in fact quite strong, because you know well the importance of Hong Kong in terms of absolute business for the watch business. So achieving that kind of performance with that strong headwind means you have very strong success. In one of the territory where the watchmakers are huge success these days is China, Mainland China. And Mainland China, the growth rate is quicker and is accelerating. So here we are more than happy with the development of the watch business.
Verkart was mentioning earlier in the talk, the improvement of the bottom line, that is done in the same time. And I can repeat what I was saying here, our sellout continue to be quicker than our sell in. So for all the elements, the whole building of the category to achieve as well, the stronger and stronger performance is continuing in a very strong way.
The
next question is from Francesca Di Pasquantonio of Deutsche Bank. Please go ahead.
Yes. Hi. Good morning, Sofia and Burkart. Thanks for taking my question. Good morning, Franchesca.
Good morning, Franchesca. Good morning, Franchesca. Please.
Understand is more qualitatively how you are seeing the process of innovating the process impacting the performance of Cartier on the positive or on the negative side and your expectations going forward? The second question is going back to the online. And although we were, I would say, quite prepared to see that
this
business would continue to require significant investments and step up in costs. I was a bit surprised by the magnitude. And what I wanted to and how you believe and how we should be thinking about expectations for the future, I. E, is this going to normalize over the next 12, 18 months?
Okay. Listen, Cartier I guess you're referring to Cartier, right, because we've been discussing this for, yes, I'd say a number of years, and ever since Cyrille Vigneron with his team launched this program. I mean, basically, we're talking about a project a week, right, throughout the year. This is what we're talking about. I'd say in general terms, obviously, CapEx and depreciation are negative and sales uplift out of renovated stores are positive, right?
Listen, this is we have to do this. Cartier management is convinced that they have to do this for the simple reason that if you want to be a leading brand or the leading brand in the jewelry space, you have to fulfill your customer expectations. And I've said it before that when Cyrille Vigneron came in to CEO of Cartier, he made a very simple but structured assessment with teams. And one of the points that came up were that the Cartier boutique network needed a bit of refocusing, which he's done quite quickly in terms of closing some of the stores because the number has come down step by step over the last 2 years and then upgrading the customer experience in some of the stores or in most of the stores through a new boutique concept but also focusing on the flagship footprint across the different regions. And I'd say this has continued as planned, so nothing is surprising for us in this.
The when you renovate a boutique, what you want to have coming out of that, and that's what we have been doing over many decades now, is an uplift in sales because you readapt, you readjust to what your current customer expectations are. So there is a clear link. We just don't do this for the having nicer stores, but they also have to produce the results that justifies these investments. And then obviously, we add
Go ahead. Sorry. No, no, sorry. Go ahead. I'll ask.
Yes. And then obviously, we have but for Cartier and that is more limited. We open new stores whenever there is a new opportunity. For example, now the timing might be off, right? But Hong Kong, there is new development there, K11, where several of our brands have opened with great success.
You have Hudson Yards in New York. It's a new development. And we had to shift distribution. If you stay with Hudson Yards, Cartier has closed the store on 59th Street, Madison, and is now focusing on the Maisons and on Fifth Avenue and Hudson Yards. So there's a constant shift in order to adapt.
So and we've had that in other places of the world as well. We're focusing also not only on the flagship stores, but these are of prime importance, but on renovating the rest of the network. And as I said, it's about 1 project per week. So that's quite a significant and heavy charge also for the teams.
And you wouldn't say that this has created disruptions and negative repercussion on overall top line, there hasn't been anything which has gone differently from your expectations? No. In terms of the execution? Okay.
No, no, no. Okay. I mean, you know how it is when we renovated the mansion, okay, that's a big store. And then you have the effect of closing the mansion and then reopening the mansion. But these are really, I would say, more technical effects.
What would be more worrying and that I cannot confirm at all is that once you close down a major store for 3 to 6 months to renovate it and then when you reopen, the traffic doesn't come back. You have an increase in traffic. That's what we see in our businesses when you renovate a store, not the other way around. On the online distributors, was it surprising for us? No, it was not surprising.
For us, it was planned as such. They're going through the 3 projects or major projects that we called out, the replatforming that is progressing, the online and the JV with Alibaba that has opened and then the preparation for the to receive the operations from the Richemont Maisons. So that requires investment. We're not worried. We're not surprised because it was planned as such, And that is the nature of the game.
When you're in a business that or in a distribution space or the market that is dominated by technology, you have to invest into technology. And not only technology, but also logistics and fulfillment capabilities behind to be able to preserve your leading edge, and that's what's happening there.
The next The
next question is from Louise Singlehurst of Goldman Sachs. Please go ahead.
Hello, Louise.
Good morning to all. I'll obviously start off by saying good morning to Jerome, Bertcard and Sophie. Thanks for taking
my questions. There was a
smile back on its face.
Well, sadly my questions are going to be on YNAP rather than the pure fashion. But just to think about the progress, and I know you've touched on a couple of these comments already, but in the context of the reminder about the long term objectives for the group are not really focused on the quarterly numbers. You just help us think about how you're balancing the delivery of the top line in the online distributors with the operating profit question? We've obviously had quite a promotional environment in the last few months. And I suppose just circling back on the gross margin comments, can you give us any color between the gross profit and the OpEx component within the online distributors?
And then my second question, just following up from that, I'm not after any longer term guidance. I know we're not going to get it. But in terms of color on the progress at YNAP in terms of that EBIT evolution and this obviously follows on from comments on the prior question, but is this year the trough that we should expect given the fact you've got the benefits of China coming through, but you've obviously also got a little bit more IT spend going through the OpEx line. If you can help us understand the shape of the EBIT profile over the medium term, that would be incredibly helpful. Thank you.
Thank you for the questions. Here they are describing big time the agenda of the Maisons. First, it's about having YNAP being more global. So and that's an important part of the agenda. You remember long time ago, it says the announcement of the JV for Middle East.
This one is to come. Last year, we announced the JV in China and this one is happening just now. And we see there very promising success and what we can see already is that the strong level of operation excellence in execution, excellence in service. So that's where we see one big part of the agenda. A second part of the agenda is enhancing the quality of the service.
The technical platforms that we're using before were not, I would say, making possible localization. That's why, for example, in Japan today, you still have only YOOX being operating in Japan. With a newer technical platform will be capable to have our major digital Maisons to operate in Japan next to the other territories. The new technical platform will also allow a larger spectrum of payment possibilities and much more capability to serve our clients at large and our VIC in particular. So all that triggers new conditions of trading or so called cost of trading, cost of doing business.
And that's what our margin evolution is traducing than any other particular aspects of it or Mozzie. And on top of that, that's in YNAP where you have the combination of NAP, Mr. P, Ziottnet and NUCs and then 2 of them being active in full price, the other one in not only in full price. So you have to read these numbers as well as a combination as a four factor more than being here is the tradition of a more promotional rhythm of activity. Do we believe in the business?
Yes. And what is indeed to be noticed in 12 months? If you remember 12 months ago, the question was, is that business model relevant or not? Could there also format of business, meaning platform being the future and acquiring goods, managing inventory, creation being part of the future. So last 12 months, they showed that creation, acquiring goods, managing inventory, offering rare products in a qualitative way as a strong future and has been winning over the last 12 months, which is very important if we speak strategy and further development.
And finally, what is also for is very important and YOOX NET A PORTER have been working a lot as well with most of their brand partners, since developing omni channel capacities and capabilities. Already one major brand, Landrichment, is experiencing a new format called a new era light, which are advanced omni channel capacities and possibilities. And we see in this combination of digital and brick and mortar a very strong source of business development. We do believe that with the evolution that we see of the world of wholesale and we're experimenting it over the past within the watch business, it's very important to reinvent the relation with the clients. That relation is very digital, is very one client focused.
And then in that constellation of where channel are disappearing and that's more direct relationship between client and Maisons that we see a bright and very stronger source of value between the traditional Maisons of Richemont and the historical partner of YNAP and YNAP itself.
The
next question is from Susana Pusch of UBS. Please go ahead.
Hello. Good morning.
Thank you for taking my question.
We don't hear you very well. Can you
hear me
now better? A bit better, but it's still muted.
Can you
hear me now? Your thinking regarding the whole, I guess, luxury online business going forward. Because I presume it's not only my impression, it has become incredibly promotional. And it feels a little bit like it's getting worse and worse because one retailer does 10% off, the next one does 15% and the next one does 20%. So do you have any plans to respond to that?
Are you planning to focus more on the top line so we can expect to see more discounting or which will come at obviously at the expense of your profits? Or are you planning to maybe prioritize the profitability of the business going forward? Just even high level thinking would be interesting because it does feel a little bit like a race to the bottom. Secondly, on the outlook. Now I do understand you don't really guide, but I think it has been commented before that you were expecting OpEx to grow slower than sales.
Now I was wondering if this is still your expectation going forward and especially when it comes to jewelry Maisons because the reality is that margins have been really impressive, resilient staying above 30% in the next last couple of years. But we are seeing more inflation in the market. Your peers are and Legi Goods are spending more on A and P. And should one of your big competitors become part of a rather large group, I think we could see also bigger A and P spend in jewelry. So I was just trying I'm trying to understand if you have any specific targets, meaning you want the profitability in jewelry main zone to stay at least 30 percent?
Or will you be willing to give that up if this is needed to defend your position in the category?
Yes, Suzanne and Burkhard here. Let me just answer the second question first because at my age, you start to forget questions. So the Julien Maisons have a very high level of profitability. It's our area of expertise. We have leading brands.
Two things to that. 1, we have always said and we will continue to say that and do that, is that we will continue to invest into these Maisons. They have a as their retail businesses, as their worldwide businesses, they have a strong need of capital investment, and they have a very high level of capital return. So as you can see, that equation really works out very well for us. But it means that we will have done that over decades now.
We will continue to invest into these Maisons, and we have built them into the industry leading assets, if I can say it in financial terms. And we will continue to do that in the future, irrespective of what the competitive environment is. We believe that with Boucherlati now, it's not really significant today. But when you reflect back on Van Cleef, it was not really significant when it was acquired by the group, and it's one of the references in the industry now. And we intend to give all the means for this Boucherlati Maisons, all the means to Boucherlati to be able to grow.
So we'll continue to invest also in that space. So we're not too worried about that. And because we're leading that space with Maisons, which are clearly positioned on the luxury side, on the high end side of that market. So second point I wanted to mention, don't read too much into 3 months, 6 months, half year results, whatever, because we don't manage like that. We don't manage for Q1, Q2.
We don't manage for 1st semester, 2nd semester. We've always spelled out that the view of Richemont is that we want to create long term value for shareholders through the creation of and the continued investment to create brand equity because brand equity will then translate into long term value for the shareholders. So semester 1, semester 2, Q1, Q2, these are all valid questions. I understand that they're models behind, but we don't manage the business like that. I don't want to lecture you.
I'm just saying this is not the way we manage the business.
Sorry, just to follow-up because I also tend to forget questions at my age. So I mean, maybe to put it differently, would you say that the margins at Jewellery Maisons are probably at their peak? And it means that if the environment gets a bit more competitive and if the cycle I mean, we are probably going to see some sequential slowdown generally globally. So would you say the margins have peaked at Jullrie Maisons? Or and you are willing to invest so we could expect a bit more pressure going forward?
Or can they still go higher? I guess maybe
that's a little more about the question.
To be
honest, I would not qualify that at all because I simply do not know. I simply do not know and we simply do not know how the competitive environment is going to play out. I mean, if you would have asked that question 10 years ago, we probably would have said, yes, yes, they probably have peaked and then the boom with the Chinese customers came. So and it has brought not only Armaisons, but I'd say the entire industry to a different size. So I will not be able to answer that question.
Okay.
If I may, yes, if I may on the digital distribution, you point something which is very interesting, which is a relationship between digital distributors and the different products and the clients. So at YNAP, we see our point of differentiation in 3 key dimensions. 1st, YNAP and even more now, we think Mau as the largest number of clients. So we are the best in introducing new Maisons and new capsule. As it was mentioned, we introduced 200 new brands since April within the environment of YOOX NET A PORTER and we launched 90 exclusive capsule.
So all that bringing the opportunity to have exclusive and specific offer. The second one, which is also linked to our position of leader in that dimension is that we have very strong relationship with our brand partners and we are working with the key players to offer the best product and then I would say at the right time. We buy the inventory and thanks to that we can offer the best inventory and the best time when it comes to that. And that along that, we already have a big chance to have a chance to have very competitive value creation and not to fall into only a promotional business approach, which is for today and for tomorrow. We do believe that what we experiment with New Yearlyte, we do believe that the one stock omni channel solution will create a further competitive advantage.
So today, we have a competitive advantage because we have more clients. So we can introduce better and a more efficient way as a Maison. The team is good in curation, so we can help the Maisons to curate and to have the best capsule offer that can meet the best success. Tomorrow, further in the journey of technology, with the omnichannel, we'll be capable to offer 1 stock solution. That one stock solution will offer, I would say, a very strong optimization of which stock to which client in which geographic dimension.
So that's all this combination are making us very confident in the capability of the business to have a strong current.
But sorry, just to follow-up because I don't think I understood. So this has a positive impact on your ability not to discount more? Or it means your profitability will be higher from operational perspective? Because I mean, yes, I think I agree you're one of the stronger players, but you are still discounting. So is it that you're going to be discounting less because you think your position will be getting better?
Or you think that operation you will be more efficient and that will be able to offset probably some pressure at gross margin level?
I think that the answer is not only into the question itself because again, being a multi billion company in that field, give you the opportunity to have more and more categories and more and more specific offer. And I do believe that the more we expand the categories, carryover categories that are and you have luxury goods are one of them. And you have the chance to have a product with very, very low discount rate. And on the other side, the more specific products you have, the better you create, then the less you have to discount. So it takes energy and probably even more intelligence into the business game.
But I don't consider discounting and reduction of commercial margin as a fatality for that activity.
Can I just add one thought to that? There's 2 ways of looking at the online distributors. 1 is, well, it's a distribution platform, and you focus on operational results and margin and discount. And that was the sense of, I think, the discussion you just had with Jerome. The other point is, if you step back and you think about what the future of the luxury distribution will be or could be.
If you come to the conclusion, as we have that we at Richemont have that the future is all about new retail, meaning the online and offline retail, which will first be linked and then will blend, then you need assets in that space. We have the our very strong and very focused offline retail distribution network around the world, about 1100 stores. And we have a very, very strong, if not the strongest asset in the luxury online distribution, which is called YOOX NET A PORTER. If you believe and then we have started a joint venture or a partnership in with Alibaba in the online space in one of the biggest, if not the biggest luxury markets in around the world. Now if you take all these together, we believe that we have the building blocks to actually create new retail going forward, alone with partners with the assets we have.
And then the discussion shifts to different areas. This could then mean that, well, having an asset like YOOX NET A PORTER is part of doing business, is the cost of doing the business because it will enable us to build the new retail infrastructure around the world. Now if you tend to believe that, well, online is just an additional channel and it will remain meaningless or not so relevant for our customers, then you will focus more on the physical distribution network. We tend to have a belief that new retail is the future, and we have backed these beliefs with an acquisition or with several acquisitions. And by the way, you have to look at it also that we are financing the investments not only into our Maisons but also into YOOX NET A PORTER through free cash flow that we generate.
So in that aspect, we are actually quite relaxed. We know it's a business because it's technology driven, where we will have to continue to invest in technology and fulfillment capabilities. And we have the unique opportunity to leverage these investments to hook it up with our physical retail network because that's where our belief lies.
Thank you, Susanna. We'll have to jump to the next questions because time is running out. And I would like some other analysts to be given the opportunity to raise questions.
The next question is from Patrick Schwindeman of ZKB. Please go ahead.
Hi, Patrick.
Good morning, Jerome. Good morning, Sophie. Good morning, Jerome. Good morning, Borchardt.
Good morning, Patrick.
What is the situation in Europe? Do you see an improved environment because there is more tourism? That's my first question. Second question maybe for Jerome. What is your strategy regarding the watch mechanical movements?
Will you still order from Swatch Group next year?
Okay. Thank you for the questions. I will answer the second part of the question and then I leave Luca to comment on the development in Europe. So you know that Richemont and Suez Group have been has been historical partner in term of industrial supply. Richemont is buying to Suez Group numerous products.
You spoke from the movement, but we also buy Spirel, so other components for our watches. And we'll continue to buy from Swede Group various elements. When it comes to specifically the movement, I cannot comment where our Swad Group and the Comco are. So there I leave you to ask them where they are with that dimension. But I like your question as well to give me the opportunity to comment where we are globally with the supply chain for our watches.
You know that, Fishmore has been building its industrial base, it means its own capacity to develop movement. First, within the Maisons that historically has been always building and producing movements. It's the case with Jaegeran, for example, so the case with Vacheron that are internally integrated and producing for themselves the movement, but also true now for components and kits of spare parts that are used by various Maisons of the Group. So today, when it comes to movements, the 1st supplier of movement for Richemont is Richemont. So give us, I would say, is a way to project ourselves into the future with a lot of serenity in that context and environment.
And then like all the industry, we have to see and to hear how our Schwechat Group will adapt its strategy for the future, given the new regulatory environment. But I said, we have the tools to adapt ourselves to whatever will be the situation next year.
Patrick, on Europe, listen, I've been I think I've been saying this for a while. After with all the things that are being thrown at our industry but also other industries in Europe, actually, quite happy with the business. I mean, you have Brexit, but it's not only that. Remember what was happening in France. I'd say on the political environment in many of the major markets for us in Europe are difficult.
And just to trip down memory line, in the past, we've had a big part of Chinese business or tourist business, which was very volatile. Now we have, since 2 to 3 years, focused very strongly on building, redeveloping our business with local clientele and local clients and that year after year after year is increasing that sales portion. So I think that gives more stability to us or to our business in Europe. If we look a bit more into the trends, obviously, and probably counterintuitively, the business in the U. K.
Has been very strong. It's become our biggest market in Europe now. Other markets have been either slightly up, slightly down. There is a bit of tourism going on. We know part of it is or most of it is linked to exchange rates or exchange rate driven buying, be it in the U.
K, from Asians, be it also from Americans. In general terms, jewelry and retail are up across the region. In general terms, watches and wholesale are down across the region because there is a link because we continue to work on all the elements that we already discussed, sell in lower than sell out. We're at the end of closing down of wholesale relationships, but it's still visible in the first half of this year. So I'd say in general terms, we are satisfied with the business given the circumstances, put it that way.
And then to complete as well the landscape with a strategic view as well here, For us, an investment in YOOX NET A PORTER, in Watchfinder, in Bouygueshilati or having even I would say the newer Fashion Easy, all these dimensions are also to make Richemont into developing its anti fragile strategy for the future. Maybe 4, 5 years ago, the importance of tourism was so high in our business in Europe that we are building our and developing our business with a high rate of agility. The development of the locals now with this new initiative give us the opportunity to be more and more local driven and to have a direct product offer marketing initiative that are driven by the local needs and that very specifically in the different markets. And again, Richemont has been investing for a long time in service center. Richemont has more than 26 service center around the world to take care of the product.
Remember that we launched an extension of guarantee earlier this year. Extension of guarantee means that Jaeger has been offering 6 years of extension of guarantee. This month we'll have further news of Maisons of Richemont they will offer extension of guarantee. We do believe that offering these additional services, offering new initiative in marketing, new point of contact with digital, is anchoring Richemont very deeper with the local clientele and is embedding anti fragile element for the future development of the group and for Maison. Okay.
Thank you, Jerome.
Thank you.
Thank you, Patrick. Next question please.
The next question is from Ray William of SBG Securities. Please go ahead.
Hi, Ray.
Hi. Good day, everyone. Just two quick questions. I'm just curious about the general trend in Chinese spending, where you can measure them around the world. Because if I look at your organic numbers in Europe and America, it was basically flat and China or Asia overall just up 4%.
So is it fair to assume that the spending trends have weakened over the past year and also considering that the renminbi has weakened in recent times? So that's my first question. And then the second one, just on the online distributor side. I mean, you did mention about the gross margin pressure due to promotional spending as well as free delivery. So is it fair for us to assume that these lower margins will remain in place for the foreseeable future?
Thank you. Okay, Rea, I'll take the first question. If you look at our business or if you look at Chinese spend, put it that way, It was for a long time was it's about a quarter of the roughly €80,000,000,000 market with Chinese customers. About a quarter of that was in Mainland China and 2, 3 quarters of it outside of Mainland China, meaning with the traveling Chinese. So these numbers are changing because there is, since about 2 years, a very strong trend to onshore Chinese purchases onto Mainland China.
So we said that for quite a while. And that's why we see and not only us, but many other of our peers, we see the strong and consistent growth of sales in Mainland China. The rest of, let's say, the tourism business very much depends on exchange rates or exchange rate driven purchases. The renminbi has weakened, so that clearly has an impact on the tourist business. And we've always called that out because we just don't know how the exchange words are going to move.
So very strong business in China and continued very strong business in China. On
the margin element, I can say again what I said before, we do believe for the online distributor that there is a mid to long term very strong capability to maintain or to develop margin, thanks to a very specific offer. So in here, again, it's linked to the number of Maisons we can host within YOOX NET A PORTER. If you see what is happening with the JV in China is a good example. We have, for example, 15 new brands joining Fengmao just in this month of November and that trend will continue at the same rate. We recruited 200 new Maisons on Nynix Net A Porter since the start of the year.
That's one aspect. The second aspect is definitely the dynamic of the categories. Some categories are less exposed than others to discount because they have a higher rate of carryover. So the higher rate with higher rate of carryover within our offer will have a good way and a good solution to approach this potential erosion of margin resulting from the pressures that brick and mortar will sell primarily as on its today's business.
Okay. Thank you, Dino. Thank you, Ray. We're really running out of time. We'll take questions from 2 more analysts and then we'll close the call.
So next question please.
The next question is from Charmaine Yap of Redburn. Please go ahead.
Hi, Charmaine.
Hi there. Hi, there. Good morning. I have a question on the retail network, please. If I look at the increase, especially in the franchise stores, there's been a lot of increase in Specialist Watchmakers.
I know some of these were in the Middle East, but what is the rationale or is there a strategy behind these franchise openings? And the second question is on Cartier and in jewelry in general. Do you think there is enough innovation brand? I know you spoke about a lot of communication spend, but can you maybe please explain a little bit if there's any changes in your marketing strategy? How much is on digital?
Any color there would be helpful. Thank you.
I will leave to Burkhart to comment the second part on jewelry. I will tackle the subject of external boutique. First, to be clear, we had a little bit of reclassification and putting, as you say, in good Swiss German of our classification of external boutique, so that it was a margin between it could be a margin between the different brands. Nevertheless, that's true and that's part of our strategy to extend the external boutique. Why do we think that it is important for Maisons?
We think that there is still a future for brick and mortar and there is still a future for wholesale and for traditional distributor of watches in relation with our Richemont Maisons, along with the capability to offer superior stock, superior experience. For the stock inventory here, we have been working along around the concept of Trudemann. We monitor the sellout of more than 90% or 90 5% of our distribution for all our Maisons, not only to, I would say, to manage the risk of other stock, but also to have the right stock at the right place, because we are not only monitoring how many what is the total turnover done, we're monitoring with our partner which watches so that we can ensure a better assortment in better place. Better place means for most of the time capability to have more service to and when it come to more service that's it can be along with offering more prominent location to go shopping to having direct after sales service activity in the boutique itself. So that's superior service, that's superior stock availability, that superior advice capabilities on-site.
We do believe that it is with external boutiques that we can do it at best. So it has been expanding for sure in Europe. It's now moving as well quickly in the US. And then in the rest and it will further follow in the rest of Asia. And we do believe that a big and better way to work together in the future.
At the end of the day, it's about aggregation of clients. So here, with this external boutique in the brick and mortar way, we can create with our partner a very efficient way to aggregate the clients.
On the if I might, Sabine, on the jewelry side. So there were if I understand, there were 2 questions. 1 is about product innovation and my feeling about it. And second, on the nature of marketing spend. Let me just try to qualify what I think about the inventory about the product innovation.
This has I mean, it's a jewelry business, and the nature of a jewelry business is that the, I'd say, the evolution of the collections, meaning the creativity that you're touching upon, is very much linked to a mid- to long term cycle. If you launch a jewelry collection today and if you look at what our brands, Cartier, Van Cleef, what they have today on offer, these are collections that in many instances, have been built over 10, 20 years. So and some even much longer because they are of constant appeal to our customers. Why are they of constant appeal to our customers? Because they are being animated constantly each and every year.
Why is it different from fashion? Because the inventory investment is significantly higher. And you won't go into markdown or discount cycles as you do in with fashion products. So the nature of it is very much different. Now if you look at what has happened at Cartier under the new management, they first and foremost focused both on the watch and on the jewelry side, on the existing collections.
When I'm saying the new management, meaning when Sirui Vignon came into back into the group and took over Cartier as the CEO. They're focused on relaunching the watch offer. They're focused on extending the existing jewelry lines. And now this year, they have come out with a new collection Clash. Sophie mentioned it a bit earlier in the presentation.
That actually has gained very quickly a lot of traction with and it's very, very relevant, as are many of the other collections, for today's customers. So yes, we believe there is innovation. There is enough innovation. It's just the cycle is so much longer. This is not a fashion business.
This is a business which is mid- to long term also because the jewelry items you acquire or watch items you acquire have the promise of long term value preservation or long term value appreciation. So once again, this very much influences my answer to your question. For the marketing side, the marketing spend, it's been a trend since 5 years that obviously marketing spend has more and more shifted from the traditional to the more digital media. The mix is somewhere between 30% 40% digital. We've said it before, it's a trend that is ongoing between the Maisons.
So that will be the next and the last question.
The final question for today is from Thierry Kota of Societe Generale. Please go ahead.
Well, it's going to be actually 2 very short questions regarding watches. The first question was, would you say when you look at H1 that the sellout of your retail partners in terms of growth was similar to what you've seen in your own retail stores? Number 1. And number 2, in terms of sell in versus sell out, my understanding was that as of this summer, the strategic sell in below sell out would be finishing. Would you expect now in the 2nd semester, one would be more or less equal to the other?
Or given what's happening in the market and of monitoring sell in versus sell out on a more tactical basis, still sell in is likely to remain below sell out until the end of the year?
Thank you for the two questions. The first element about selling sellout retail and I had a very interesting question about external retail. So external retail internal retail is growing with a Specialist Watchmaker, which is good news. When it comes to external boutique, it's also growing, it's even growing quicker than our internal retail, because that's new opportunities that create on the market. Traditional wholesale is below the trend of retail being internal and external.
And it's still a little bit the end of the long tail of qualitative adjustment of our distribution. You know that it's not a thing when you have been working long times that you do in a night. When it comes to stock management for the months to come, we adjust monthly. So every month we adjust our volume of production in total and more than anything we adjust where we put our inventory, because that's indeed not only very important to have the right level of production in front of the right level of demand, but also to have it in the right location. Today, it's not a big wonder, a big surprise if I tell you that we are focusing a lot on China, Mainland China.
And if we are not only focusing a lot on Mainland China, but also on our digital activation program. And here that's a very quick learning phase. There are 12 Maisons of Richemonts that are active on Figma on the joint venture. So it's excellent also in term of learning and developing best practice when it comes to our supply chain and Agile supply chain system to be aligned with demand and the standards of e commerce where Alibaba organize it and make it happen. But these elements make us being very confident in the capability of our Maisons to engage very much in the digital dimension.
And after reconstructing, which has been part of what we did during 2 years, we are now tackling more business development approach, external boutique is definitely 1, digital is definitely the second one in our program.
And then when will you align?
The alignment between selling and selling and selling, yes, is constant. So today we are not we are happy with our level of stock. So I would say we reduce the level of stock because we have less doors. So basically, and when we have less doors, we anyhow have less stock in the market. So it tends to go down in absolute term because they are less doors.
And for the partners that we have in the doors where we are, we are now we have stabilized now as a level of stock. Said that there are a few Maisons of which we've spoken that have a quick growth this year. This one anyhow not answering the demand of today. So this Maisons are even reducing their stock toward because they cannot meet exactly the demand of today. So I would say, globally speaking, we have still a reduction of stock, but that's more a collateral effect of success of Maisons and then offer closure of those, then a good decision to have a quicker and a stronger rotation even.
And the closure of doors, a big step was done until this summer. And if I understand well, it carries on until Christmas, but on the lesser scale. Is it correct?
Yes. So it's very much we are very much at the end of this long tail of activity, very true. Correct.
Okay. So basically, sell in okay. Thank you. Thank you very much.
Thank you very much. Bye bye.
Thank you. So this concludes today's call. Many thanks for your participation and all the many questions you raised. If there are some more James or myself, happy to answer them later on today. And in the meantime, we look forward to reading your papers.
Have a good day.