Swatch Profits Tank – Coronavirus Watch 27

SWATCH Big Bold Jellyfish

The Swatch Group has just released their 2020 half-year financial report [click here for pdf]. The announcement revealed the combined worldwide numbers for Breguet, Harry Winston, Blancpain, Glashutte, Jaquet Droz, Leon Hatot, OMEGA, Longines, Rado, Union Glashutte, Tissot, Balmain, Certina, Mido, Hamilton, Calvin Klein, Swatch and Flik-Flak. As our headline reveals, Swatch profits tanked . . .

Hamilton Murph close-up

The Group posted a net loss of CH308m ($327,833,969). That’s compared to a net profit of CH415m ($441,597,391.50) in the same period a year ago, and twice what analysts had predicted. Strangely, that’s not how their financial report started . . .

After a strong January with an operating margin of 21.4% in the Watches & Jewelry segment (without Production) and 17.3% for the overall Group, [we experienced a] massive decline due to state-ordered closings of at times up to 80% of distribution channels worldwide.

Translation: January was great and our profit margins were awesome! And then bam! Coronageddon. By the end of the six-month period Swatch sold 46.1 percent fewer watches in the first half of 2020 compared to 2019. Swatch’s execs insist that the downturn is only temporary. Very temporary.

Korman Fine Jewelers Austin, TX

The Group’s management is convinced that the sales and profit situation will improve quickly in the coming months, parallel to the further easing of Covid-19 measures in the countries . . . A positive operating result is expected for the full year.                

Being “convinced” about an “improvement” isn’t the same as presenting convincing evidence that a fast and full recovery is in the offing. (Bulgari CEO Jean-Christophe Babin reckons his brand is looking at least a two-year downturn.) To bolster their bluster, Swatch’s report trotted-out the stats for their biggest market: The People’s Republic of China.

Swatch profits depend on China

Wow! From -83 percent to +76 percent! As ServPro might say, it’s like Coronageddon never happened! Only . .

Wealthy Chinese used to buy their luxury watches abroad. Post-COVID, it ain’t happening. So you have to balance the Chinese bounce against the downturn in London, Paris, New York City and other Chinese luxury watch buyers’ meccas. Swatch sales charts for those regions are conspicuous by their absence.

What’s more (or less), many analysts see China’s recent luxury goods sales as “revenge spending.” Given the gloomy economic outlook in China and around the world, the horological splurge could sputter and die. And China accounts for half of all Swiss watch exports. Well, it did.

OMEGA Constellation blue and gold - new watch alert

The positive outlook is strengthened by the new products which will be launched in the second half of the year, as well as the lower cost base.

The Swatch report assumes new watches will stimulate sales – as they have in the past. But the past is past. Last year, the Apple Watch alone outsold the entire Swiss Watch industry’s 2019 annual output. A feat Cupertino repeated in the first quarter of this year.

Swatch profits - Flik Flak

One of the Swatch Group’s 18 brands is about to launch an answer to the smartwatch: Tissot. All the brands at the lower end of their food chain – Swatch, Longines, Hamilton, Certina, Tissot, Flik-Flak – are directly in Apple et. al’s line of fire. Meanwhile, what’s that “lower cost base” all about?

Streamlining of the retail network, which had already commenced in the previous year, was accelerated due to the exceptional market situation. In the first half of 2020, approximately 260 stores were definitely closed, which resulted in a significant reduction in employees abroad.

Swatch store

So Swatch was closing retail stores before Coronageddon and used the shutdown to “definitely” shut down 260 stores (down from over 2,000). As a result, the conglomerate terminated 2400 employees. post-gazette.com sees dark clouds.

In a break with its strategy during previous crises such as the 2009 financial downturn, Swatch is leaning more on slashing jobs. Chief Executive Officer Nick Hayek has said that during hard times, the problem with cutting jobs is it’s difficult to find qualified staff when the market rebounds. It appears this year is different.

Most of the terminated outlets were Swatch and Calvin Klein stores (Swatch has bailed on the CK brand). With malls closing by the hundreds, the bricks and mortar distribution channel for Swatch’s low-end products is blowing in the wind. And so . . .

SWATCH X with pattern

“Ecommerce is only going in one direction,” Swatch Board Member Peter and U.S. President Steiger assured the audience at the press conference. “Upwards. We are guiding the Group out of physical distribution.”

Steiger specifically mentioned Swatch and OMEGA, emphasizing the “positive effect” reduced costs had on the Group’s bottom line.

Steiger said American online sales doubled during lock down. From what to what he didn’t say. No doubt Swatch’s Swatch brand accounted for the lion’s share, but OMEGA was “the superstar.” (OMEGA dealers won’t be happy to hear that news.)

Swatch profits revealed

Swatch’s half-year financial report is best viewed in light of two major trends: smartwatches annihilating low-end watch brands (as Seiko and Citizen know well) and the global recession dragging down sales of high-end brands (e.g., Breguet, OMEGA).

The regular suspects are happy to spin the spin. And it is true: Swatch’s stats depict the China crash as a big ass blip. But I reckon Swatch’s prediction of an ongoing and rapid recovery from Coronageddon is overly optimistic.

The smartwatch crisis and COVID-19’s economic impact are a one-two punch bound to leave even the best run watchmaker reeling. If not now, soon, and for a long time to come. Swatch this space.

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