Morning Note: Market news and updates from Richemont and Sage.

Market News

US equity markets – S&P 500 (-0.6%), Nasdaq (-0.6%) – drifted lower last night. This morning in Asia, markets traded on a firmer footing: Nikkei 225 (flat); Hang Seng (+0.7%); Shanghai Composite (+0.4%). The FTSE 100 is currently little changed at 7,438.

Resilient US retail consumer spending helped propel the economy in recent weeks, according to the Federal Reserve’s Beige Book. Holiday spending met expectations in most districts and exceeded them in three, including New York. The 10-year Treasury yield rose to 4.08%.

The yield on the UK 10-year government bond rose by 16bps to 3.96%, the highest level in five weeks, as traders pared back bets on interest rate cuts, after inflation rate in the UK unexpectedly rose in December. Sterling trades at $1.2695 and €1.1660.

Brent trades at $77.75 a barrel. The US approved a $1.1bn aid package to keep California’s last operating nuclear power plant running, AP reported. BHP’s iron ore production in the October-December period fell 2% from the year before, while copper supply rose 3%. Output forecasts remained unchanged for all assets except coking coal which was lowered. Gold has fallen back to $2,011 an ounce.

Britain’s biggest banks are bracing for a new mis-selling saga – this time with car loans. The FCA has reached out to around a dozen banks, people familiar said, and RBC estimates potential compensation costs may reach £10bn.

Source: Bloomberg

Company News

Richemont has this morning released a strong sales update for the third quarter of its financial year ended 31 March 2024. In response, the shares have bounced 9% in early trading.

Richemont is a Switzerland-based luxury goods group which generates annual sales of around €20bn, split between retail, wholesale, and online distribution. The group owns a portfolio of leading international ‘Maisons’ which are recognised for their distinctive heritage, craftsmanship, and creativity. Jewellery Maisons include Buccellati, Cartier, and Van Cleef & Arpels. Specialist Watchmakers account for 19% of sales. Fashion & Accessories ‘Maisons’ (termed ‘Other’) include leather goods, clothing, and writing instruments, etc. This division now includes Watchfinder, a leading omni-channel platform for premium pre-owned timepieces. The group has agreed to sell a controlling stake in YOOX Net-A-Porter (YNOP), the leading online luxury retailer.

The company’s products are discretionary purchases. Currency movements, and their impact on tourist flows, can also have an impact on sales at the regional level. As a result, sales were impacted by the pandemic and remain vulnerable to the continued uncertain macro-economic and geopolitical environment.

However, in the three months to 31 December 2023, sales increased by 8% at constant exchange rates (CER) to €5.6bn, leaving the 9-month growth rate at 11%. By distribution channel, Retail increased by 11% at CER, and now represent 70% of group sales.   Wholesale was up 4%, while Online Retail fell by 5%. As a result, online sales now account for only 6% of group sales. By segment, growth was strong at the Jewellery Maisons, up 12% at CER, Specialist Watchmakers grew 3% and the Other division was down 1%.

The group’s largest region, Asia Pacific, enjoyed strong quarter (+13%), fuelled by a 25% sales increase in mainland China, Hong Kong, and Macau combined, on favourable comparatives against the prior-year period, more than offsetting softer performance in several other Asian markets. Japan grew by 18%, benefitting from growing domestic sales and strong tourist spending.

The Americas grew by 8% driven by driven by a resilient economy and lower purchases abroad by domestic clientele. Europe fell by 3% as higher sales to Chinese and domestic clienteles did not compensate for an overall reduction in tourist spending. Finally, the Middle East & Africa was up 10%, reflecting both robust local and tourist demand in the UAE and Saudi Arabia.

As expected, today’s announcement was a sales update, with no disclosure on profitability. We note that the business generates a high gross margin (almost 70%), helpful to cushion against increased costs. The group did highlight its net cash position, €6.8bn at the end of the quarter, reflecting solid trading performance and proceeds from exercise of warrants under the 2020 shareholder loyalty programme.

Source: Bloomberg

Sage Group has today released a brief but reassuring trading update for the three months ended 31 December 2023, the first quarter of its FY2024 financial year. The group has made a positive start to the year and reiterated its full-year guidance. The shares have been a strong performer over the last year but have succumbed to some profit taking this morning (-2%).

Sage supplies technology that helps businesses of all sizes manage everything from money to people. This is done through Sage Business Cloud, a business management solution comprising Accounting, Financials, Enterprise Management, People & Payroll and Payments & Banking. Software subscription penetration stands at 81% as the business continues the transition towards subscription and Sage Business Cloud. The group is focused on increasing recurring revenue (now c. 95% of the total), delivering attractive operating margins and strong free cash flow, and paying a progressive dividend.

Total revenue grew by 10% in organic terms to £573m. Small and mid-sized businesses are continuing to digitalise despite the ongoing macroeconomic uncertainty. Organic recurring revenue increased by 11% to £554m. Software subscription revenue grew by 14% to £466m. 

Sage Business Cloud revenue increased by 18% to £454m, driven by growth in cloud native revenue of 25% to £174m, primarily through new customer acquisition, and by growth in cloud connected revenue from both existing and new customers.

Regionally, in North America recurring revenue increased by 13% in organic terms to £259m, with a good performance from Sage Intacct together with continuing growth in Sage 50 cloud and Sage 200 cloud. In the UKIA region, recurring revenue grew by 8% to £162m, driven by further success in cloud native solutions (including Sage Intacct, Sage Accounting, and Sage Payroll), alongside growth in Sage 50 cloud. In Europe, revenue increased by 7% to £152m, with a strong performance particularly in cloud connected solutions.

As usual at this stage, there was no update on profitability or financial position. However, the group does have a robust balance sheet, with cash and available liquidity of £1.3bn. At the last balance sheet date (September 2023), financial gearing stood at 1.0x net debt to EBITDA. In response, the group is currently undertaking a share buyback programme of up to £350m. 

Despite the current macroeconomic environment, Sage has reiterated its guidance for the full year to 30 September 2024. The group expects organic total revenue growth to be broadly in line with FY2023. Operating margins are expected to trend upwards, as the group focuses on efficiently scaling the business.

Source: Bloomberg