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Big watch groups dominate half-year results
Economy

Big watch groups dominate half-year results

Friday, 06 September 2013
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Christophe Roulet
Editor-in-chief, HH Journal

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While half-year figures show a subdued performance by the watch divisions at Hermès and LVMH, it’s a different story altogether for the industry’s mastodons, led by Swatch Group and Richemont.

Commenting on its 2013 half-year results, published at end August, Hermès observes that its watch sales, down 1%, were “affected by the general downturn in the watch industry and the high basis for comparison of the previous year.” For the rest of its businesses, from its legendary silk scarves to leather bags, the group is evidently in fine form. With consolidated net profit progressing 13.9% to EUR 381.7 million and consolidated sales amounting to EUR 1,767 million (+11%) for the six months from January to June 2013, plus an operating margin of 33.1%, Hermès continues to outperform even the most optimistic forecasts.

Hermès International : share price over 1 year (Source: Les Échos)
Kering : share price over 1 year (Source: Les Échos)
Double-digit growth

The watch industry’s major groups are also a picture of health, despite the “general downturn” pinpointed by Hermès within the sector. The figures speak for themselves: Swatch Group’s Watches & Jewelry segment posted 9.1% growth for the first half-year. The group’s operating margin jumped to 22.7% while its headcount increased by 1,150 over the same six-month period. Over at Richemont, watch and jewellery sales progressed by 17% for the 2012-13 financial year which ended March 31st. As for Kering, sales by its luxury division, excluding Gucci, Bottega Veneta and Yves Saint Laurent, grew 11% for the year ended June 30th 2013.

LVMH, on the other hand, joined Hermès in registering a slide in watch sales. Its Watches and Jewelry segment dropped 3% over the first half of 2013. The multinational attributes this to “restrained purchasing by watch retailers and the voluntary closure of certain multi-brand points of sale.” LVMH nonetheless recorded an overall increase in revenue of 6% compared to the first half-year 2012.

Richemont : share price over 1 year (Source: Les Échos)
Swatch Group : share price over 1 year (Source: Les Échos)
Size matters

To have any impact, these figures should be viewed in the light of Swiss watch exports for the same period (for want of better, as these do not take sales to end customers into account). They show a 1.5% increase for the first six months of 2013 compared with the same period one year earlier. Relating this figure to sales by the above-mentioned groups, all listed companies, shows that those with at least ten watch brands in their portfolio, i.e. Swatch and Richemont, clearly performed better than the branch as a whole. Put simply, they are pulling in an ever bigger share of the watch market.

Although the more diversified multinationals – in this instance LVMH, Hermès and Kering – may have other strings to their bow, hence why they are such firm favourites on the stock exchange, when it comes to watches, clearly size matters. It’s as though, in a sumo match, one wrestler’s decision to play tactical is squashed under the sheer mass of his opponent. A mass which, in this case, weighs heavily in production capacity, distribution networks and communication resources, all backed by cash flow which can finance the right acquisitions at the right time, particularly of suppliers and contractors.

While the sector’s giants are basking in growth, brands on the other side of Planet Watch are feeling the pinch from the slowdown that began early in the year… all of which suggests further concentration could be on its way. The recent snuggling-up of Corum and Eterna is a case in point. A sumo needs to carry weight! As John Cox, an analyst at Kepler Chevreux, reminds us, of the top ten Swiss watch brands in terms of business volume, seven belong to Rolex, Swatch Group or Richemont.

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