Swiss Watchmakers Are in a World of Pain

July 15, 2016, 10:15 AM UTC
Swiss watchmaker Swatch Group CEO Nick Hayek shows on March 12, 2014 shows the new Swatch Touch Zero One wristwatch during a press conference to present annual results of the worlds No. one watchmaker in Corgemont. AFP PHOTO / FABRICE COFFRINI (Photo credit should read FABRICE COFFRINI/AFP/Getty Images)
Photograph by Fabrice Coffrini — AFP via Getty Images

Swatch Group, the world’s largest watchmaker, warned investors that profit would at least halve in the first half of the year after sales fell in Hong Kong and Europe, pushing its shares down almost 12%.

Swiss watchmakers are grappling with weak demand as fewer Chinese tourists shop in Hong Kong and Europe where they have been deterred by the fear of Islamist attacks. A strong Swiss franc also pushes up the production cost for Swiss watches.

A deadly attack in the French city of Nice on Thursday night when a truck plowed into crowds celebrating Bastille Day killing more than 80 people added to the pressure on luxury goods and travel companies.

“France looks difficult and is likely to stay difficult,” Swatch Group CEO Nick Hayek told Reuters in a telephone interview.

“It is an important market. That is where tourists start their tours to most European countries.”

Paris, hit by deadly Islamist attacks last November, is an important shopping destination for tourists, many from China, and the Swatch profit warning marked the start of what is likely to be a downbeat earnings season for the luxury industry.

“Nice is going to further hurt the sector. Tourists just won’t want to come to Europe and particularly France during the summer,” Kepler Cheuvreux analyst Jon Cox said.

Shares in Swatch (SWGAY), whose brands also include Omega and Longines, slid 11.6% to 256 Swiss francs by 8:44 a.m. GMT, on top of a 17% fall so far this year and a 21% drop last year. Peer Richemont also fell 3.9%.


Margins Wilt

Overall net sales at Swatch are likely to have dropped around 12% in the first half of 2016, the group said in a statement, dragging operating and net income down by 50-60%.

Adding to the pressure on margins, Swatch said it had no plans to cut staff and also planned to maintain investments in new products and marketing. Swatch employs more than 36,000 in over 50 countries.

The company also said it saw only limited scope to push through price increases.

“The indication for a decline in operating margin from 18 to 9 percent has to be seen as a disaster or some one-offs are included,” Vontobel analyst Rene Weber said.

The company publishes full results on Thursday, July 21.

Hayek tried to put a brave face on the results.

“The first half is not so bad under the circumstances. Our profit about halved, but it’s still a profit,” Hayek said, adding positive developments in mainland China, the Olympic Games, where flagship brand Omega is official timekeeper, and a favorable comparison base should help in the second half.

“If you have a drop in sales to the extent that we have seen, you cannot make up for that even with the very good performance we have in many countries,” he added.