Richemont's Valuation Sustainability Post-Share Price Surge

The recent 18.9% annual surge in Richemont's share price has sparked debate over whether the luxury goods giant's valuation is anchored in robust fundamentals or driven by speculative momentum. A closer examination of its financial performance, sector dynamics, and sustainability strategies reveals a nuanced picture.

Jewellery Dominance and Regional Resilience

Richemont's FY25 results underscore the growing dominance of its jewellery division, which accounted for 71% of total sales in Q1 2025, up from previous years, according to the Richemont Q1 2025 report. The Jewellery Maisons-led by Cartier and Van Cleef & Arpels-posted an 11% sales increase year-over-year, driven by strong demand from ultra-high-net-worth individuals in Europe and the Americas, as noted in that report. This segment's operating margin of 31.9%, reported in the Richemont FY25 results, contrasts sharply with the 5.3% margin in the Specialist Watchmakers division, which saw a 13% sales decline in FY25 in the same results. The divergence highlights a structural shift in consumer preferences toward high-value, aspirational jewellery over traditional watchmaking.

Regionally, Europe and the Americas emerged as growth engines. Europe's 11% sales increase was fueled by high jewellery events and local demand, while the Americas benefited from a 17% surge, reflecting the resilience of North American markets, as detailed in the Q1 report. Conversely, Japan's 15% sales drop in Q1 2025 reported in that Q1 publication underscores the vulnerability of mature markets to macroeconomic headwinds, such as a strong yen and shifting consumer behavior.

Valuation Metrics: A Tale of Two Analyses

Richemont's valuation appears contradictory. A discounted cash flow (DCF) analysis suggests shares are overvalued by 66.6% relative to intrinsic value, according to a Simply Wall St. analysis, while its price-to-earnings (PE) ratio of 26x aligns closely with the calculated fair ratio of 27.7x in the same analysis. This discrepancy may stem from differing assumptions about future cash flow growth. The DCF model likely discounts the sustainability of jewellery demand, whereas the PE ratio reflects current earnings power and market confidence in the company's ability to maintain margins.

The Group's robust cash flow-€8.3 billion in net cash as of March 2025 reported in the FY25 results-provides a buffer against volatility, enabling strategic flexibility in dividends or acquisitions. However, the 7% decline in Specialist Watchmakers' sales noted in the FY25 publication raises questions about long-term diversification. If the shift toward jewellery is cyclical rather than structural, Richemont's valuation could face downward pressure.

Sustainability and Long-Term Risk Management

Richemont's FY25 Non-Financial Report emphasizes a sustainability framework aligned with Global Reporting Initiative (GRI) standards, including climate-related disclosures and a transition to Double Materiality Assessment, as outlined in the FY25 results. Environmentally, the company is prioritizing energy efficiency and renewable energy in owned facilities, while socially, it focuses on talent development and craftsmanship preservation, according to the same results. These initiatives mitigate regulatory and reputational risks, enhancing long-term resilience.

However, the Group's governance structure-overseen by the Board of Directors and Governance and Sustainability Committee-must ensure that ESG commitments translate into measurable outcomes. For instance, the revision of the Supplier Code of Conduct described in the FY25 publication could address supply chain vulnerabilities, but execution will determine its effectiveness.

Conclusion: Fundamentals or Speculation?

Richemont's valuation appears supported by short- to medium-term fundamentals, particularly the jewellery segment's outperformance and strong cash generation. However, the DCF analysis and declining watch sales suggest risks to long-term sustainability. The recent share price surge may reflect optimism about jewellery demand and ESG progress, but investors should remain cautious about overreliance on a single product category.

For now, the valuation seems justified by current earnings and cash flow, but structural shifts in the luxury market-such as the rise of bespoke timepieces and evolving consumer priorities-could reshape the landscape. Richemont's ability to balance innovation in jewellery with revitalizing its watchmaking heritage will be critical to sustaining its premium valuation.