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Press Release and commentary: Swatch Group Results for 1st Half 2016

by Simon Neo on July 28, 2016

Swatch Group Results for the first half of 2016 summary:

 

The Omega Seamaster Bullhead "Rio 2016" Limited Edition.

The Omega Seamaster Bullhead “Rio 2016” Limited Edition.

 

  • Group net sales of CHF 3 716 million at current exchange rates, a decrease of 11.4%, or CHF 3 666 million, a decrease of 12.5% at constant rates.
  • In the Watches & Jewelry segment, including Production, Swatch Group recorded a decrease of 11.3% at current exchange rates.
  • Double-digit growth in retail sales in Mainland China and Southeast Asia.
  • Hong Kong: retail sales downturn has bottomed out, wholesale remains difficult.
  • Operating result of CHF 353 million, 53.6% below the first half of the previous year, due to additional currency shifts, lower production utilization and the long-term industrial strategy of continued investment in the employees, new products and marketing. The operating margin reached 9.5%.
  • The Watches & Jewelry segment, including Production, achieved an operating margin of 11.2%.
  • Net income of CHF 263 million, 52.0% below the first half 2015. Net margin was 7.1%.
  • 60% Swiss made in the watch industry as of 2017 is a clear advantage for Swatch Group, with its verticalized local production base. Inventories have already been increased accordingly in order to meet future demand for Swiss made products.
  • Harry Winston with a strong half-year and a record month in June.
  • Clear improvement in Mainland China. The first three weeks of July show a very positive development compared to last year, especially in the Luxury and Prestige segment, very strong for Breguet, Blancpain, Glashütte Original, Omega and Longines.
  • United Kingdom with a strong July start in the Group’s retail stores, due to the favorable pound sterling. Clear signs of tourism revival in parts of Europe, mainly in Spain and Italy. Additionally, Omega’s engagement in the Olympics in Rio de Janeiro will generate further positive stimulus. Overall clearly a stronger second half-year will be expected.

 

Commentary and Analysis

For the first half of FY 2016, we see a huge dip in the Group’s net sales from CHF 4192 million in 1st half FY 2015 to CHF 3716 million in 1st half FY 2016, a decrease of 11.4%. The group attributed the decrease in sales to events such as the Brexit decision which we do not think have that big of an impact given it only happened recently. Part of the decrease in net sales can also be linked to the economic downturn in Hong Kong where wholesale still remains low as local distributors are not keen in reordering due to poor demand levels thus, limiting choices for future customers too. In Europe, we see political events taking a hit on sales; sanctions against Russia and also the delay in issue of biometric visas to Chinese tourists. These events coupled with recent acts of terror has caused a drastic decrease in tourist numbers and subsequently, lesser business opportunities for the company.

One of the more notable change in figures is the operating results which initially stood at CHF 761 million for 1st half FY 2015 and has now declined to a low of CHF 353 million for the same half of FY 2016. Part of the decrease in figures is due to the fact that the company is continuing to pursue its strategy of keeping manufacturing base in Switzerland for all segments. By pursuing the aforementioned, the company intends to keep their people employed despite poor sales performance and instead continue to invest in Switzerland as a production base. The company does this to ensure they have the capacity to meet any sudden influx of demand.

We have to agree with the company’s strategy in doing so and this can be substantiated by the nature of the company’s products. The process of creating timepieces especially in some of the company’s high-end brands such as Breguet or Blancpain require highly specialized professionals and the number of qualified watchmakers trained per year is glaringly low, for instance in FY 2016, there were only 180 trained graduates joining the group. Hence, if the group decides to vary headcount with demand levels, they will stand to lose out if they cannot meet additional demand when there is a sudden influx of it. Should they choose to instantly hire qualified professionals to meet the demand, there may be a shortage of professionals around for hire which can potentially lead to higher training costs to train new joiners.

In addition, the lower operating results can also be attributed to the additional expenses incurred for the upcoming Olympic Games in Rio de Janeiro where double-digit millions have been booked for the first half of FY 2016. The group hopes to achieve worldwide recognition and boost for the Omega brand through its sponsorship as well as launch of the nine watch models that has been dedicated to the Rio de Janeiro Games.

For the future outlook for second half of FY2016, the group expects clear growth in local currency compared with the second half of FY2015. It has confidence that with a unique brand portfolio and its global retail and distribution network, it will remain strong in all regions in local currency. The group anticipates positive development for Southeast Asia and most parts of Europe except for France and Belgium where fears of recent incidents has caused tourist numbers to shrink. We certainly hope that the group will experience positive developments in the coming half of FY 2016 and look forward to a better performance in the next report.

 

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.

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