Swatch shares plunge on warning of profit collapse

Swatch Group shares plunged as the watchmaker warned of a collapse in first-half profit and cut sales guidance for the year, adding to a luxury malaise that has spread from Hong Kong to other top markets such as France and Switzerland.

The stock fell as much as 14 per cent as the Swiss maker of Omega and Tissot timepieces said earnings slid 50 to 60 per cent. Analysts had expected a 22 per cent drop in net income.

The impact on demand of Thursday's deadly attacks in Nice means sales will be less than forecast earlier in the year, chief executive Nick Hayek said by phone.

“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.

Mr Hayek said the first-half profit didn’t include any one-time items. The CEO 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.

“In the early beginning of the year, the signals were positive in France and Switzerland that tourist bookings would pick up again in spring, and 5 per cent sales growth in local currencies in these countries was possible,” Mr Hayek said.

“After what happened in Nice last night, I can say I will have to revise that downwards.”

Group sales for the year may be down as much as 6 per cent in Swiss francs, Mr Hayek said. The company’s goal “is to get as close to zero as possible”.

First-half sales missed estimates, falling 12 per cent.

“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, Mr Cox said.

Reducing fixed costs in fine watchmaking is harder than in most industries because finding skilled craftsmen is difficult. Mr 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 Mr 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 as much as 3.2 per cent in Paris. Kering, whose brands include Ulysse Nardin, declined 2.4 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. Mr  Hayek said the second half will show growth on the prior year, helped by both demand in mainland China and southeast Asia, and less taxing comparisons.

The company said it will report full first-half earnings by July 21st. – Bloomberg