PARIS — Swatch Group said net profit jumped 24.5 percent to 579 million Swiss francs, or $640.2 million, in the first half thanks to booming demand for its watches and components, but the company warned the continued strength of the Swiss franc would keep eating into sales and profits in the second half.
The Biel, Switzerland-based group, whose 19 brands range from luxury Breguet timepieces to affordable plastic Swatch watches, said gross sales totaled 3.36 billion Swiss francs, or $3.7 billion, in the six months to June 30, up 11.4 percent when adjusted for the impact of currency fluctuations. At constant exchange rates, sales grew 24.2 percent.
Currency conversions were made at average exchange rates for the periods to which they refer.
The world’s largest watchmaker said it continued to outperform its sector peers despite production bottlenecks and rising raw material costs, as lower watch and jewelry sales resulting from the March disaster in Japan and Greece’s ongoing debt crisis were more than offset by rising demand in other regions.
“The outlook for the group in the second half of the year remains promising, particularly given the fact that July is confirming the trend in sales and results of the first half,” Swatch Group stated.
“Continuing strong growth and the positive outlook in local currency will, however, be hampered by uncurbed speculation in the Swiss franc. This will further negatively impact sales growth as well as operating profit and net income,” it added.
Swatch’s net income of 579 million Swiss francs, or $640.2 million, compared with income of 465 million Swiss francs, or $430 million, the previous year. The operating margin increased to 23.7 percent from 21.8 percent in the corresponding period last year as order books ramped up.
Sales of watches and jewelry rose 27.4 percent at constant exchange rates, and by 13.3 percent when factoring in the impact of currency changes. This compared with an overall 19.3 percent rise in Swiss watch sales in the first half, according to the latest data from the Federation of the Swiss Watch Industry.
Meanwhile, Swatch Group’s revenues in the production segment for watches, watch movements and components rose by a record 28 percent after currency adjustments, with substantial backlogs in deliveries of movements, hands and dials.
The group said it planned to continue stepping up investment in new plants and staff to keep pace with demand, though it hopes to eventually phase out deliveries of components to third parties in order to focus on its own brands.
Switzerland’s competition regulator said last month it would allow Swatch Group to reduce its supply of mechanical movements next year by 15 percent versus 2010 levels, and its deliveries of assortments by 5 percent.
The Swiss Federal Competition Commission has opened an enquiry into whether shutting off supply to third parties completely would constitute an abuse of Swatch Group’s dominant position, in violation of competition law. It expects to complete the probe in the second half of 2012.
HSBC Bank reiterated its recommendation that investors be “overweight” in Swatch Group stock following the better-than-expected results.
“We believe that valuation…fully factors in the negative impact linked to the [Swiss franc] strength whilst it fails to recognize the group’s exposure to Greater China (33 percent of sales in 2010, the highest in our coverage), superior pricing power, strong balance sheet and unrivaled manufacturing backbone,” HSBC said in a research note.
Shares in Swatch Group closed up 2.6 percent at 435.20 Swiss francs, or $401.02 at current exchange.