Swatch Group 2017 Financial Result and Analysis

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A few weeks back, Swatch Group announced their results for the 2017 Financial Year. Last year is a seemingly wonderful year for the Swiss Watch conglomerate. The key headline is perhaps the 5.4% growth that they have recorded in their net revenue on a year-on-year basis. This had a big influence on their net income, which increased by 27.3% to CHF 755 million, on the back of a wider net margin (9.5%, up from 7.9% in 2016).

In terms of headline figures, Swatch Group had certainly performed fairly well last year. This came from the backdrop of an excellent economy, which had performed unexpectedly well despite the numerous potential scares that had occurred throughout 2017. To put this into perspective, the Dow Jones Index – which tracks 30 major companies within the New York Stock Exchange – had rose by 28.11% in 2017 (with dividends reinvested). The other major talking point would be the world of cryptocurrencies, in which the Bitcoin had grew 1,300% in value last year. Although the former is a better gauge of market sentiments, the latter had certainly made some people very rich. This would have a ripple effect on the economy – inducing spending on discretionary items, such as luxury goods.


Introduction to the Swatch Group


Harry Winston is one of the twenty brands under the Swatch Group umbrella.


Swatch Group is perhaps one of the largest conglomerates in the horological industry. Besides the production of watches, Swatch Group’s portfolio also includes jewellery, retailers, as well as movement producers.

The Swiss conglomerate currently owns eighteen watch brands, as well as two multi-brand retail companies. The brands within Swatch Group’s portfolio is rather diversified. It ranges from entry-level brands such as Flik Flak and Swatch, to the high-ends ones like Breguet and Harry Winston. Of course, they also own some of the world’s most well-known watch manufacturers – which includes Omega, Longines, and Tissot.


Swatch Group 2017 Key Financial Result


The Group’s revenue in 2017 increased by 5.4%, to CHF 7.96 billion. This is supported by the 6.9% growth in sales from the Watches & Jewellery segment, which traditionally constitutes more than 95% of Swatch Group’s revenue (Figure 1). While the available figures for the revenue breakdown were from the 2016 Financial Year, we can safely deduce that the trend remained similar in 2017.


Figure 1: Based on historical statistics, more than 95% of Swatch Group’s revenue is derived from Watches & Jewellery. Source: Bloomberg


It is also notable that this result was also partially contributed by the sales figures in December. While we do not have the exact figures of the sales during that period, but Swatch Group mentioned that last December’s turnover was the second best monthly figure in the entire history of the conglomerate. This pretty much coincides the bullish economy that we have observed, have attributed to the extraordinary turnover in the final month of 2017. This is also in addition to the fact that December is the month of festive seasons (Christmas and New Year’s Eve), and it also coincides with bonus payout period for some corporations.

On the same note, all the segments within the conglomerate enjoyed a “highly accelerated sales growth”. This is most pronounced in the entry-level and middle range segments. Brands, particularly Flik Flak, Swatch, Calvin Klein, Hamilton, Mido, and Tissot achieved strong growth rates in the second half of 2017. It is also important to mention that export figures for the Swiss Watch Industry had dropped during this period, which meant that market shares in the entry-level and middle range brands within the Swatch Group’s portfolio had increased substantially.


Figure 2: Historical statistics on Swatch Group’s revenue breakdown, in terms of geography. While we were unable to gather the breakdown for 2017 in press time, we have noted that Greater China has been consistently generating the greatest turnover for the conglomerate. Source: Bloomberg


In terms of revenue breakdown by geography, Swatch Group had pointed out that there is a “marked growth” in Mainland China. Historically speaking, the Greater China region (Figure 2) had contributed to more than 30% of Swatch Group’s total revenue. Although the figures have fallen since 2015 (due to the graft crackdown, which accelerated in the second half of 2014), but it certainly remains a key market in Swatch Group’s portfolio with the country’s growing affluence. Other notable regions that achieved substantial growth in 2017 includes Middle East, Japan, North America, and selected European nations (Great Britain, Italy, Germany, Austria, Benelux, and Switzerland).

Following that, the net income in 2017 also increased by 27.3%, from CHF 593 million (2016) to CHF 755 million. This also meant that their net margin had increased by 1.6%, from 7.9% in 2016 to 9.5% in 2017. The increase in margin can be attributed to the reduction in cost of goods sold, as a result of improved productivity. According to Swatch Group, the two main reasons for that are (i) the vocational training that is provided to 700 workers, and (ii) a total investment of CHF 464 million in non-current assets. A majority of the investments from the latter are made in production, both in the latest production methods and innovative production equipment and processes. This helps to improve productivity (or efficiency) and therefore reduce costs. Additionally, the fact that Swatch Group’s decision to maintain its workforce may also increase motivation and morale within the conglomerate – which results in the greater net margin.

The improved financial results have led the board to propose a dividend payout of CHF 7.50 per bearer share, and CHF 1.50 per registered share. This is an increase of 11.1%, from CHF 6.50 per bearer share and CHF 1.35 per registered share respectively. It is also worth noting that these dividend payouts are back to the same level as the ones in 2015, when Swatch Group had achieved a strong revenue of nearly CHF 8.5 billion.


Competitor Analysis


The result from Swatch Group is definitely positive, given that the figures in 2017 had outperformed the previous year. The performance is consistent with the general trend in the industry as well, with the Federation of the Swiss Watch Industry FH announcing that the watch industry exports has seen a slight growth of 2.7% in 2017. This brings the total export figures to around CHF 19.9 billion, just short of the CHF 20 billion mark.


Figure 3: LVMH’s watches and jewellery sector produced a great performance in 2017. Source: Bloomberg


Moët Hennessy Louis Vuitton SE (LVMH) – which owns brands such as TAG Heuer, Zenith, and Hublot – had displayed a growth of 11.9% in the watches and jewellery segment in 2017 on a year-on-year basis (Figure 3). It is also interesting to see that ever since Jean-Claude Biver had taken over the helm of the Head of Watchmaking in LVMH in March 2014, the segment had seen a steady growth over the last few years.

On the other hand, Compagnie Financière Richemont SA (Richemont) – which owns brands such as Montblanc, Vacheron Constantin, A. Lange & Söhne, IWC, and Jaeger-LeCoultre – showed a 6% growth in their revenue figures in the Specialist Watchmakers segment. The result, however, was captured for the 6 months between 1st April 2017 to 30th September 2017 (due to the difference in accounting period). It would be interesting to see if Richemont had the same performance as Swatch Group in the fourth quarter of 2017 – following the factors that we have mentioned earlier that may have potentially increased discretionary spending.


Outlook in 2018


In their memo, Swatch Group mentioned that they are “anticipating further very positive growth”, from a variety of distribution channels that they currently have. This includes the usual – in the form of retail and e-commerce – and third-party channels.

In terms of the individual brands, we have some of the key highlights in terms of their outlook and strategy for 2018.


The Omega Seamaster 300 SPECTRE Limited Edition. Omega will be celebrating the 70th anniversary of the Seamaster collection in 2018.


First up, we have one of the strongest brands in Swatch Group’s repertoire: Omega. This year is certainly an interesting year for Omega. The main highlight is perhaps the Seamaster collection, in which Omega will be celebrating both the 70th and 25th anniversary for the Seamaster and Seamaster Diver 300m respectively. Besides the Speedmaster, the Seamaster is one of Omega’s most well-known collection. It will be interesting to see what the brand had come up with to commemorate this occasion, especially since 2017 had been a rather eventful and successful year for Omega with the launches of the limited edition watches (such as the Speedy Tuesday and the 1957 Trilogy Collection). It is also worth highlighting that Omega is also the official timekeeper of the XXIII Winter Games that is being held at PyeongChang currently – which will further broaden the brand’s exposure in the global market.


The Harry Winston brand will further strengthen its brand presence with the opening of new boutiques globally.


On the high-end spectrum, Harry Winston will be strengthening its global presence with the opening of new boutiques in various locations worldwide. This includes Rodeo Drive in Beverly Hills, San Francisco, Istanbul, and Zürich, as well as an additional flagship store in Hong Kong Central. Both Breguet and Blancpain will be looking to work on their current line-ups, and we can expect to see new models within some of their collections.


Rado will be launching new collections – focusing on innovative materials and surface structures.


On the other end of the spectrum, Swatch Group is looking to continue with their two-pronged strategy – through a stronger suite of products, as well as continuous effort in marketing. Rado, for instance, will look to strengthen its position in ceramics with the launch of new collections that focuses on both innovative materials and surface structures. As for Longines and Tissot, they will be looking to increase their brand exposure through sporting events – such as the Commonwealth Games in Australia, and the Tour de France. Tissot is taking it a step even further, through its collaborations with MotoGP and NBA. These two brands are certainly key in Swatch Group’s portfolio, where they are poised to contribute more than CHF 3 billion in sales in the medium term (CHF 2 million for Longines, and more than CHF 1 billion for Tissot).


Further Thoughts


The results from the 2017 Financial Year shows a positive sign of recovery for Swatch Group, following a blip in the past few years. While the turnover is a tad shy of the CHF 8 billion mark, but we reckon with the current trajectory, ceteris paribus, Swatch Group may potentially match the same figures that they have achieved in 2015.


Longines is one of Swatch Group’s strongest performers; its revenue is poised to hit the CHF 2 billion mark in the medium term.


However, the demand drivers for discretionary goods, especially for Swatch Group, is highly dependent on the economy. The growth in 2017, as mentioned earlier, can be attributed to the positive sentiments in the economy. The wealth effect, which could have been contributed by the tremendous rise in values of equities and cryptocurrencies, may have induced some discretionary spending on luxury goods. However, the first two months of 2018 may have showed signs of a reversal. The values of cryptocurrencies have fallen dramatically (almost by half since their peak, for some of major cryptocurrencies in terms of market capitalisation), and the equities market had a scare over the last two weeks with its fluctuations. It would also be good to keep a look out at the various economic indicators (such as GDP, Employment Rate, and Wages Growth) of the markets where a majority of the sales are from (e.g. China, Europe, and America). This could also provide an indication as to where the sales figures will be heading. In addition, key financial events in 2018 – such as the Brexit negotiations, various national elections, and OPEC’s 7th International Summit – may have an effect on the economy as well.

The uncertainty in the market may perhaps become the greatest challenge not only for Swatch Group, but the industry as a whole. The ability for Swatch Group to sustain its earnings, or even to improve it will depend largely on their strategies not only in the upcoming years, but also in the medium and long term as well. What is particularly strong about Swatch Group is the diversity in its mix – ranging from the no-frills brands such as Swatch, to the entry-level luxury brands such as Longines and Tissot, and eventually the mid-tier and high-end ones like Omega, Breguet, and Jaquet Droz. This is not something that its competitors, or the independent maisons, can offer. We believe that henceforth in an economic downturn, the impact may be less muted for Swatch Group.


Tissot is one of the few brands within the Swatch Group that has an e-commerce presence. We foresee that the other entry-level brands within the portfolio will follow suit in the near future.


Finally, it is also interesting to see Swatch Group venturing into e-commerce space. Regardless of whether the brand is taking on either the “showrooming” or “webrooming” approach when it comes to the online retailing experience, we reckon that a strong online presence will be important for the Group in its long-term strategy – especially for its entry-level brands. So far, we believe that only Tissot and Swatch are the only brands within Swatch Group that has an e-commerce presence. While we do not have the figures for its sales online to gauge its effectiveness, but we foresee that Swatch Group will definitely roll this out to the at least most of the entry-level brands within its portfolio. This will definitely increase the addressable market, considering that clients in some region – especially in United States or China – may need to travel for extended hours to arrive at a watch boutique.

In short, 2018 will be an interesting year – and we will be certainly keeping our eyes peeled as the development unfolds. Let us know what are your thoughts, and your personal outlook on the industry in the comments section below.


The author of this report does not hold a financial interest in the securities of Swatch Group, does not receive compensation for this report, and does not have any employment relation with the subject company. The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author to be reliable, but the author does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity, and the author will not be responsible for any financial losses that are derived from any financial investments based on this information that is found in this article. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. 


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