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UPDATE 2-Richemont sees profit hit as Hong Kong weakness persists

* Five-month sales down 13 pct at constant exchange rates

* To report about 45 pct first-half profit drop on Nov. 4

* CFO says inventory buy-backs largely over, no more job cuts (Adds chairman, CFO, analyst quotes, shares)

By Silke Koltrowitz

GENEVA, Sept 14 Luxury goods firm Richemont expects first-half profits to nearly halve after sales slipped in the first five months of its financial year and it was forced to buy back inventory from Asia in the face of weak demand.

Swiss watchmakers are grappling with a combination of collapsing demand in Hong Kong, which used to be their biggest market, tourists avoiding Europe for fear of Islamist militant attacks, and high costs exacerbated by a strong Swiss franc.

"Buy-backs and store closures will not be the end of it, we'll have to slim down into the real demand of the market," controlling shareholder and Chairman Johann Rupert told investors at their annual general meeting (AGM) on Wednesday.

Sales in the five months to the end of August fell 14 percent, more than the 11.3 percent drop expected on average by analysts. Stripping out the impact of currency changes, sales were down 13 percent, also below expectations.

Richemont shares, which have fallen 17 percent so far this year after a decline of almost 19 percent last year, were down 3.2 percent at 1226 GMT.

Richemont said low tourist activity hit sales in Europe, particularly France, while Japan suffered from high comparable figures and a strong yen. Sales in Britain benefited from the pound's fall following the June vote to quit the European Union.

The maker of Cartier jewellery and IWC watches has cut some jobs and also bought back watches from retailers in Hong Kong.

Since China's government took measures to crack down on gifts for favours about four years ago, demand has suffered and 2014 political protests in Hong Kong exacerbated the problem.

The reversal caught watchmakers and retailers wrong-footed and demand for pricey watches in Hong Kong, where mainland Chinese used to buy luxury goods due to lower taxes, have never recovered.

EXCESS STOCK

"To my amazement, not too many of our competitors are following suit ... some of them, esteemed companies, continue to pump excess stock into the market that will inevitably end up in the grey market," Rupert said.

The company's finance chief, Gary Saage, said the inventory buy-backs were largely over and no more job cuts were planned.

But given there was no sign the negative trends would reverse in the short term, Richemont said its operating and net profit in the six months to the end of September would fall about 45 percent, hit by one-off restructuring charges and the buy-backs.

"Obviously, to me, that's unacceptable," said Rupert, adding that the firm had enough reserves to withstand the problems.

French rival Hermes said on Wednesday it would no longer provide an annual sales growth forecast starting from next year due to the increasingly uncertain trading environment.

Several analysts recommend buying Richemont shares, with Kepler Cheuvreux expecting operating margins to recover and Exane BNP Paribas seeing the first signs that watch buyers were starting to return to shops.

Investors at the AGM also tried to put on a brave face.

"They are doing the right things, cutting staff, buying back stock ... the cash flow is impressive," said shareholder Carine Menache, adding that Rupert was used to handling crises.

($1 = 0.8912 euros)

(Additional reporting by John Revill in Zurich; editing by Louise Heavens and David Clarke)

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