LONDON — Shares in Swatch Group sank 10.1 percent to 51 Swiss francs, or $51.93, on Friday morning after the brand announced the first half would see larger-than-expected, double-digit declines in net income and operating profit.
The Swiss manufacturing giant said in an unscheduled announcement it’s expecting sales to fall 12 percent in the six months due to withering consumer demand and third-party order cancellations in key markets such as Hong Kong, France and Switzerland. As a result of the sales decline and other factors, operating profit and net income are expected to fall 50-60 percent.
Swatch added that sales in mainland China are growing, although they’ve clearly done little to offset the downturn in Hong Kong. The company said it would announce its first-half results by July 21.
Swatch, whose portfolio includes Breguet, Harry Winston, Blancpain, Omega, Longines, Tissot and Swatch, said the falling profits were due to other factors, too, such as a long-term industrial policy of not laying off workers during hard times; maintaining investments in new products and marketing; and pursuing a “defensive price-increase policy.”
Barclays said in a note following the announcement that luxury is a fixed-cost business and currently has low- to midgrowth in inflation. “With [Swatch] deciding not to cut costs, this has a very significant impact on operational gearing,” the bank said.
Swatch’s warning comes at a critical time for the Swiss watch industry. High-end watches in particular are no longer selling because of a crackdown on bribery in China, changing tourist and luxury consumption patterns, and weak consumer confidence.
The group’s warning came a few hours after suspected terrorists in Nice, France killed dozens of people celebrating Bastille Day on July 14. More than 80 people died — including children — after a truck rammed through crowds on one of the city’s main thoroughfares.
France has been one of the biggest victims of the downturn in luxury consumption as Chinese tourists, fearful of attacks, have been staying away and opting instead to travel within Asia.
Citi in London pointed out that Swatch’s first-half trends are worse than those in the overall watch industry, which saw exports slide 10 percent year-on-year in the January to May period.
It added that Swatch is witnessing double-digit declines in Hong Kong and a more “generally cautious mood among watch retailers,” given challenging economic conditions, stock market and foreign exchange volatility, travel fears after terrorist attacks in Europe, and depressed oil prices.
According to the Federation of the Swiss Watch Industry, Swiss watch exports dropped 9.7 percent in May, with all major territories contributing to the slide. That came on the heels of a 11.1 percent drop in April and a 16.1 percent drop in March.
On Friday, Barclays and Global Blue issued a report showing that purchases by tourists globally and in Europe deteriorated significantly in June.