Swatch Group Results for the first half of 2015 summary:
- The Group’s net sales were up 3.6% to CHF 4 248 million at constant exchange rates or 2.2% to CHF 4 192 million at current rates. Calculated in euros, the Group grew by 18.7%.
- In the Watches & Jewelry segment, including Production, the Swatch Group grew by 3.4% at constant exchange rates in comparison with the declining export of wrist watches of the Swiss Watch Industry of -1.1% at the end of May.
- Accelerated growth in May and June 2015.
- Operating profit of CHF 761 million, 8.3% under the first half of the previous year, due to significant currency shifts in the recent past. Nevertheless, operating margin reached 18.2% for the Group.
- In the Watches & Jewelry segment, including Production, the operating margin reached 20.0%.
- Swiss franc shock and negative interest rates result in a lower net income of CHF 548 million, 19.4% below the first half of 2014.
- Positive outlook for the second half of the year, with the launch of new products such as Omega’s new James Bond Edition, the introduction of the Omega Master Co-Axial with METAS certification, the Swatch Touch Zero One and the Swatch NFC (Near Field Communication) as a contact-free means of payment; as well as with the additional increase in capacity at Tissot for its very successful T-Touch Expert Solar.
Commentary and first reaction analysis
At first look the organic growth of 3.4% looks quite good against an industry decline of -1.1%. However, the net income coming in at almost 20% lower than the equivalent period in 2014 is a bit alarming. The Group attributes this to the Swiss Franc shock and negative interest rates.
If we take a look for a moment the exchange rate for EUR vs CHF, revenue earned in EUR would appear to have been hit some 10% after conversion to CHF for revenue reporting.
As the Eurozone accounts for approximately 30% of the Group’s business, so we also need to examine what happened to business outside of the Eurozone.
Most of the business elsewhere are probably transacted in CHF or USD. There is no currency loss when transacting in CHF. Taking a look at the USD vs CHF fluctuations, we see the following
The chart seems to be balance pivoted on the 15 January 2015. This is when the announcement by the Swiss authorities unpegged the Swiss Franc. It appears the market forces have come to an equilibrium, and the left side of the curve is rather similar to the right. Forecasts for the rest of the year by analysts indicate near parity or slightly bullish.
Combining the EUR and USD scenarios, the Group’s assertion the 20% lower operating revenue compared to 1H 2014 is due to the Swiss Franc dilemma seems weak. The currency dilemma does not seem to account fully to the decline in revenues. Our hypothesis is that there seems to be some form of discounting going on at the wholesale side. This possibly indicates some form of a fear instinct on the future as management pushes sales by lowering prices.
But also interesting to us is the high end side of the business. Nick Hayek Jr, CEO of the Swatch Group says, “The very high-end brands such as Blancpain, Breguet and Glashuette are having a more difficult time — not with respect to customers, they are buying — but because retailers are scared about ordering watches costing $200,000, $300,000, $400,000”. A rather curious statement. If the retailers are not ordering the watches, how are the customers buying?
Just before the results were released, Stephen Pope, Managing Partner of Spotlight Group commented that he feels there is sufficient information to suggest that the worst of the recent turbulence on top line performance is over. Swatch Group management expressed in their Press Release that they “anticipate a positive outlook for the second half of the year, despite the Swiss franc dilemma. Growth will be supported by a high level of marketing investment, an expanded retail network and through many new product launches in all segments.” We hope that the Swatch Group will be able to support this optimism, and look forward to a brighter report at the close of this year.
DISCLAIMER: We are not experts in analysing businesses, do not make any claims and will not be responsible for actions arising from our simple analysis. We merely offer this as our view, and for debate.