ZURICH – Swatch Group, best known for its Swatch, Omega and Breguet timepieces, suffered a steep fall in profits in the first half but remained upbeat for 2015 as a whole.
Net earnings slumped by more than 20 percent to 526 million Swiss francs, or $555.9 million at average exchange rates for the period, as the Swiss watch and jewelry group faced a marked slowdown in Hong Kong — one of its most important markets and the gateway to mainland China — and an overvalued currency.
Like most other top watch groups, Swatch Group incurs most of its costs in Swiss francs, but generates the overwhelming bulk of its revenues in other currencies. So when the Swiss National Bank decided in January to eliminate its minimum exchange rate against the euro — sending the already strong franc soaring — margins were inevitably going to be squeezed.
At Swatch Group, operating margins fell by 2 full percentage points to 18.2 percent in the first half. In a conference call with analysts, management indicated some margin improvement was expected in the second six months.
One of the most strident critics of the central bank’s policy, Swatch Group called the franc “massively overvalued.” But despite the currency headwinds that squeezed margins, lowered profits and limited the rise in revenues to just 2.2 percent to a total of 4.19 billion francs, or $4.4 billion, analysts and investors remained broadly impressed by the performance.
The better-than-forecast figures, along with a typically upbeat outlook for the second half, pushed Swatch Group shares up 5.23 percent to 406.70 Swiss francs, or $435.30 at the end of trading on Thursday.
The company said growth had accelerated in May and June – though it revealed no figures – and forecast a “very good” outlook in all regions and product segments for the rest of the year. That confidence was based on significant product launches to come, along with additional expenditures on marketing and more wholly owned stores.
Analysts said Swatch Group was coping relatively well with much tougher conditions.
“The results were much less negative than expected. Swatch surprised both in terms of sales and earnings,” noted Rene Weber of Vontobel.
“Swatch Group achieved a better-than-feared first half 2015 result,” added Michael Romer of J. Safra Sarasin.
But the figures also indicated the difficulties facing Swiss watch companies, which have, until recently, enjoyed bumper sales and earnings on the back of growing demand, notably from China.
Such challenges look set to persist, with Chinese demand, largely channeled through Hong Kong, remaining subdued and no obvious letup evident on the currency front, in spite of this week’s deal between euro zone countries and highly indebted Greece – a factor that has depressed the value of the euro and contributed to the Swiss franc’s rise.
“First-half sales were broadly in line yet highlighted continued weakness in underlying demand for Swiss watches, particularly in Greater China,” said Citi analyst Thomas Chauvet in a note to investors.
After steady increases in recent years, exports of Swiss watches – the only aggregate industry data available – have declined this year. Sales abroad of wristwatches in the first five months were down 1.1 percent on the same period last year.
Swatch Group earnings were also affected by the negative interest rates introduced by the Swiss National Bank this year to reduce the franc’s appeal, which have affected companies holding large amounts of surplus cash. Swatch Group’s net cash pile remained broadly stable at 1.4 billion Swiss francs, or $1.5 billion.
Among additional uncertainties confronting Swiss watch groups is the demand for the Apple Watch. While most have argued the innovation will have at worst a marginal impact on their sales, Swatch Group has itself moved to introduce new electronic features on some products, notably the keenly awaited Swatch Touch Zero One, due to go on sale next month.
Separately, the group indicated it was not interested in buying Maurice Lacroix, the Swiss midmarket watch brand put on sale this week by Swiss trading house DKSH. A spokesman said Swatch Group already had all the brands it needed.