PARIS — Swatch Group blamed a negative currency environment, high marketing expenses and a fire at one of its manufacturing plants for an 11.5 percent drop in first-half net income to 680 million Swiss francs, or $763.2 million.
This story first appeared in the July 23, 2014 issue of WWD. Subscribe Today.
Operating profits sank 8.8 percent to 910 million Swiss francs, or $1.02 billion, while operating margin came in at 20.2 percent, down 250 basis points from the same period a year earlier.
Gross sales in the period gained 4 percent to 4.35 billion Swiss francs, or $4.88 billion. At constant exchange rates, the gain stood at 8.5 percent, reflecting that the Swiss franc strengthened further against currencies in all of the watchmaker’s important sales territories.
The world’s biggest watchmaker, whose brands range from affordable Swatch watches to high-end Blancpain timepieces, said fluctuating foreign exchange rates wiped 188 million Swiss francs, or $211 million, off its books in the first half.
Dollar figures are converted from Swiss francs at average exchange rates for the period to which they refer.
Chief executive officer Nick Hayek said earlier this year that currency variations could dent the group’s revenues by up to 500 million Swiss francs, or $561 million at current exchange, this year.
“The outlook for the group in all regions and segments remains very good and a promising second half of 2014 is expected. Particularly in the U.S. and Japan, sales continue their very positive development. Also, the stronger sales trend noticed on the Chinese mainland continues,” the company said.
Some analysts were skeptical following a conference call with Hayek and Swatch chief financial officer Thierry Kenel.
In a research note, Thomas Chauvet of Citi wrote, “While we appreciate the slight acceleration in July trends (partly due to an easier base of comparison), we do not necessarily share management’s enthusiasm about a much stronger 2H14 demand outlook in light of weak June Swiss watch exports (+1 percent including -3 percent in Greater China) and broad-based industry comments that May/June have been difficult months.”
Chauvet was referring figures released Tuesday showing Swiss watch exports rose 3 percent in the first half of 2014, despite a continued drop in demand in China. Foreign sales of Swiss timepieces totaled 10.5 billion Swiss francs, or $11.8 billion, during the period, according to the Federation of the Swiss Watch Industry.
Growth slowed in the second quarter versus the first and was lifted almost exclusively by Asia, with sales in Hong Kong rising 4.4 percent in the first half, Japan up 25.5 percent and South Korea advancing 25.4 percent. Sales in China were down 4.2 percent and Singapore registered a 2 percent drop.
“Watch exports are currently perfectly in line with forecasts made more than a year ago. These remain positive for 2014 overall, even indicating a possible acceleration in the second half-year,” the federation said.
Swatch Group said most markets “except for a small number of European countries” continued to grow in the first half. The company invested heavily in marketing, especially with Omega at the Olympic Winter Games in Sochi, Russia.
Inventories rose by 303 million Swiss francs, or $340.1 million, to 5.73 billion Swiss francs, or $6.43 billion, as of June 30. The increase was due mainly to semifinished and finished products, including a new diamond high-jewelry collection for Harry Winston worth 140 million Swiss francs, or $157.2 million.
The group made two acquisitions during the period: Swiss watch glass manufacturer René Clémence SA and Canadian company H.W. Protection Inc., which provides security services to Swatch Group companies.