Swatch shares plunge 14 per cent as earnings, sales decline

Zurich: Swatch Group shares plunged as the watchmaker reported a collapse in first-half profit, showing how the malaise in the luxury market has spread from Hong Kong to other top markets such as France and Switzerland.
The stock fell as much as 14 per cent in Zurich as the Swiss maker of Omega and Tissot timepieces said earnings slid 50 per cent to 60 per cent. Analysts expected a 22 per cent drop in net income. Sales also missed estimates, falling 12 per cent.
"Investor confidence will be shaken,” said Rene Weber, an analyst at Bank Vontobel in Zurich. He estimates the operating profit margin fell to 9 per cent from 18 per cent, which is either a "disaster” or represents one-time charges.
Chief Executive Officer Nick Hayek is under pressure as he refuses to clamp down on costs, arguing that cutting prices, freezing investments or eliminating jobs would be counterproductive in the long-term. Thursday’s attack on a Bastille Day celebration in Nice, where at least 80 people died, is another blow to luxury demand on the continent, making Asians and Americans think twice about travelling to Europe.
"Swatch particularly hasn’t adjusted its cost base and that is why it is suffering from such huge negative leverage,” said Jon Cox, an analyst at Kepler Cheuvreux in Zurich.
The company may be losing market share because it’s not helping retailers by buying back unsold inventory or lowering prices, he said.
Reducing the fixed cost base in fine watchmaking is harder than in most industries because finding skilled craftsmen is difficult. Hayek has said he wants to avoid job cuts because he’ll need those employees when the market improves. That contrasts with Richemont, which is cutting about 100 jobs at the Swiss watchmaking operations of Cartier, Vacheron Constantin and Piaget.
Swatch’s Tissot brand may have been one of the worst performers, partially because it’s in a price segment that competes directly with smartwatches from Apple and others, according to Vontobel’s Weber.
The warning pulled shares of other luxury-goods makers lower. Richemont declined as much as 6.1 per cent, while LVMH, the maker of Hublot and TAG Heuer watches, dropped 1.7 per cent in Paris. Kering, whose brands include Ulysse Nardin, declined 1.9 per cent.
Switzerland’s watch exports have dropped for 11 consecutive months. In the five months through May, they declined 9.5 per cent.
The lone bright spot was mainland China, where Swatch said the market is developing positively. The country has increased vigilance on imports of watches, which has led rich Chinese to buy more domestically than abroad.
The company said it will report full first-half earnings by July 21.