Light at the end of the “Covid tunnel” for luxury groups

“While we began FY21 with our global store portfolio closed due to the pandemic, we were well prepared for the re-opening of our stores during Q1 and trading has exceeded our expectations in both the UK and the US. The UK has been driven by continued strong ecommerce sales and domestic demand in regional stores, partly offsetting greater declines in London, due to reduced tourism, and our airport stores. The US continued to gain momentum during the period with all re-opened stores performing strongly versus the prior year.” These are welcome words under current circumstances – and when the person making the declaration is Brian Duffy, Chief Executive of Watches of Switzerland (WoS), one of the world’s largest luxury watch retailers, listed on the London Stock Exchange since May last year, they spell good news for the watch sector.

Strong hopes

In hard figures, between May and July 2020 (the first quarter for WoS), the group’s sales declined 27.5% to £151.6 million but with a considerably more positive outlook than five months ago. After plummeting 83% in May, when stores were closed due to lockdown, sales for June and July were back in the black in the UK. In the US, sales grew by 27% in July, with 64% of stores open for business. On these grounds, Watches of Switzerland has strong hopes for the full fiscal year and predicts annual revenue of between £840 million and £860 million. This is slightly above the £810.5 million for the previous financial year to end April 2020. The group expects its operating margin to remain stable, in the region of 10%, which implies an increase in earnings in line with sales growth.

Latest statistics from the Federation of the Swiss Watch Industry (FH) confirm this first glimmer of light following months of darkness. After reaching rock bottom, with exports taking a -62% hit in the second quarter, the Swiss watch sector is beginning to surface. Figures for July report a significantly smaller drop in shipments at -17% year-on-year. Better still, some of the industry’s main markets are showing signs of stabilising, for example the UK (+2.5%) and Germany (-1.1%). Even the US, a key market, is bouncing back (-0.6%) after three difficult months. Watch brands are currently pinning most of their hopes on China, and results indeed confirm that the country’s watch buyers are in a buoyant mood. Exports of Swiss watches to China leapt by 59% in July, on the back of a 48% increase in June, “illustrating the early recovery in this market and the gradual resumption of domestic rather than foreign sales,” notes the FH.

China once again

Closer examination of luxury groups’ half-year results reveals a similar picture where China is concerned, in particular for those that are most active in the watch sector, and suggests there is hope for better days to come. Over the first six months of 2020, sales fell 46% at Swatch Group, 47% at Richemont for its first quarter to end June, 39% for LVMH’s watch and jewellery division and 18% for Hermès’ watch division. Kering, whose watch business, comprising Ulysse Nardin and Girard-Perregaux, carries only relative weight, held up better over the first half, with group sales down by 30%. LVMH and Hermès performed similarly at group level, down 27% and 24% respectively.

Where sales per country are concerned, the message is clear. In its half-year report, Swatch Group notes “very high customer demand in all price segments in markets which have already overcome the lockdown” and “double-digit growth in mainland China in May [+11%] and June [+13%] compared with the previous year.” After an operating loss of CHF 327 million for this first half, the group expects “a strong second half, with a positive operating result for the entire year.” At Richemont, China is also a case apart as sales there soared by 47% between April and June. For this same second quarter, LVMH notes that “Asia has seen a marked improvement in trends, with a strong rebound in China in particular.” Financial markets are already reflecting this more favourable state of affairs. For the last three months of trading to August 20th, the share price of all these groups increased. The biggest gains went to those with a high proportion of watch brands, with Swatch Group’s share price gaining 12.3%, followed by Richemont at +11%.