Swatch profit plunges as demand falls across europe, asia

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Swatch Group AG said first-half profit fell by more than half — the most in at least 15 years — as demand for its watches in Hong Kong, France and Switzerland collapsed.

Sales fell about 12 percent, the Biel, Switzerland-based maker of Omega and Tissot timepieces said in an unscheduled statement on preliminary results. Analysts expected a 22 percent drop in net income and a 7 percent revenue decline. The stock fell as much as 14 percent in early Zurich trading.

“Investor confidence will be shaken,” said Rene Weber, an analyst at Bank Vontobel in Zurich. He estimates the operating profit margin plunged to 9 percent from 18 percent, which is either a “disaster” or represents one-time charges.

Weak demand spread from Hong Kong to some core markets in Europe, especially France and Switzerland, Swatch said. Luxury sales in France have slowed due to lower inbound tourism in the wake of November’s terror attacks, and Thursday at least 80 people were killed when a truck drove into a crowd at a Bastille Day celebration.

Swatch said its strategy of maintaining headcount, investment and marketing exacerbated the profit decline. As opposed to Richemont, which is cutting about 100 jobs at Swiss watchmaking operations of Cartier, Vacheron Constantin and Piaget, Swatch has avoided mass job reductions.

“Swatch particularly hasn’t adjusted its cost base and that is why it is suffering from such huge negative leverage,”
said Jon Cox, an analyst at Kepler Cheuvreux in Zurich.

Reducing the fixed cost base in fine watchmaking is harder than in most industries because finding skilled craftsmen is difficult. Swatch Chief Executive Officer Nick Hayek has said he wants to avoid job cuts because he’ll need those employees when the market improves.

Swatch’s Tissot brand may have been most affected, partially because it’s in a price segment that competes directly with smartwatches from Apple Inc. and others, according to Vontobel’s Weber.
The profit warning pulled shares of other luxury-goods makers lower. Cartier owner Richemont declined as much as 5.5 percent, while LVMH, the maker of Hublot and TAG Heuer watches, dropped 2.7 percent in Paris. Kering, whose brands include Ulysse Nardin, declined 1.7 percent.

Switzerland’s watch exports have dropped for 11 consecutive months. In the five months through May, they declined 9.5 percent.

“It suggests that either the export data for June due to be published next week will show a deterioration or/and Swatch has significantly underperformed the export data, which will raise questions about the potential inventory buybacks the company may have also resorted to,” Zuzanna Pusz, an analyst at Berenberg in London, wrote in a note.

The lone bright spot was mainland China, where Swatch said the market is developing positively. The company said it will report full first-half earnings by July 21.

By Corinne Gretler (Bloomberg)

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About Investec

Investec is a distinctive Specialist Bank and Asset Manager. We provide a diverse range of financial products and services to a niche client base in three principal markets, the United Kingdom, South Africa and Australia, as well as certain other geographies. Investec’s strategic goals are motivated by the desire to develop an efficient and integrated business on an international scale through the active pursuit of clearly established core competencies in the group’s principal business areas.

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