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First-half results blow hot and cold

First-half results blow hot and cold

Monday, 26 August 2019
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Christophe Roulet
Editor-in-chief, HH Journal

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4 min read

Luxury firms continue to perform well, as demonstrated by their first-half results. The situation is slightly more complex for watch brands, in particular in Hong Kong and China.

As we return to work after the summer break, the question is, as always, what will the second half hold for watch brands? And where better to find the answer than in the financial results of the sector’s main representatives. In July Swatch Group published its 2019 half-year results while Richemont released its trading update for the first quarter (April-June), the start of a new calendar of quarterly announcements. They show a mixed bag of numbers. Over the first six months of the year, Swatch Group’s net sales fell by 4.4% to CHF 4.1 billion. Operating result lost 13% to CHF 547 million. A sign of the times, the group has launched action against the grey market. This has inevitably weighed on profitability and led to a rise (2.6%) in inventories to CHF 7.1 billion on the balance sheet. The report notes that “in the first half of 2019, uncompromising action was taken against grey market dealers, even though this resulted in a short-term negative impact on sales in the triple-digit millions.”

Richemont's watch brands lost 2% in sales during the first quarter.

The grey market is flourishing, particularly in China for Swatch Group brands, due to a build-up of unsold inventory in distribution networks. Richemont’s response, two years ago, to an identical problem was a clean-up operation that cost the group some €500 million spread over two business years. The same Richemont announced a 12% increase in sales to €3.7 billion for Q1 of its current fiscal year. However, excluding online distribution through Yoox Net-A-Porter and Watchfinder, both of which were consolidated in the group’s financial statements in Q1 2018, sales in fact rose by 6%. This growth is essentially attributable to jewellery (Cartier and Van Cleef & Arpels), given that sales by the group’s “specialist watchmakers” lost 2%. Richemont remains a strong favourite with investors nonetheless. Over the first seven months of the year, its share price surged 36.3% on the SIX Swiss Exchange while Swatch Group shares stagnated (+1.7%) over the same period.

Slowdown in Asia

Investors are also keeping a close watch on luxury shares in the French CAC 40 (the 40 largest stocks based on market capitalization). As their first-half reports show, France’s luxury giants continue to enjoy the wind in their sails. At Kering, revenue gained 18.8% to reach €7.6 billion. Operating income amounted to €2.2 billion (+25.3%), more than boosted by Gucci whose operating margin exceeded 40%! Hermès recorded a 15% increase in revenue to €3.3 billion, as did LVMH to €25.1 billion. Watches performed strongly for both these multinationals. At Hermès, the Watches business line gained 14%, partly thanks to the warm welcome given to the new Galop d’Hermès collection. At LVMH, revenue from the Watches & Jewelry business group grew by 8% to €2.1 billion, with a 5% increase in profit from recurring operations to €357 million, mainly thanks to Bvlgari. This excellent news has been reflected in share prices for the two. Between January 1st and July 31st, Hermès shares gained 31.4% while LVMH shares increased 44.7%.

A first softening in exports to China was recorded in June.

The biggest uncertainty for watch brands in the coming months revolves around China and the special administrative region of Hong Kong, where pro-democracy protests have erupted. Translated into export figures, this gives a drop of 6.6% in shipments to Hong Kong over the first half of 2019, largely fuelled by a significant decline of 26.8% in June. A first softening in exports to China was also recorded in June (+1.3%), suggesting the slowdown that some observers have been forecasting for months already. The Federation of the Swiss Watch Industry prefers to take a reassuring view and expects positive growth for the branch for 2019 as a whole, pointing to a 1.4% rise in exports for the first half. It does, however, make note of “the complex environment created by competition and constantly changing consumer behaviours [which] represent a permanent challenge for the watchmaking sector.” If the Asian dragon sneezes, for sure Swiss watchmakers will catch a cold.

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