While job cuts continue to shake watch firms and exports seem caught in a downward trend, financial markets and ribbon-cutting ceremonies paint a far more reassuring picture of the sector. In the space of a few weeks, Greubel Forsey, Vaucher and Audemars Piguet all opened brand-new production facilities. Meanwhile, Jaquet Droz laid the first stone for its future manufacture. Hublot recently moved into new premises and Jaeger-LeCoultre is in the final stages of extending its building. One view would be that all these investments were earmarked when the sector was riding high, and that shelving them would have been pointless. However, it also signals that these companies are sufficiently well-grounded to look beyond the present.
Share prices rally
This, in any event, is the markets’ view, if recent performances by luxury and watch shares are anything to go by. Swatch Group shares soared 76.7% over six months to mid-September, with Richemont, up 67%, hot on their heels. By way of comparison, Switzerland’s SMI blue-chip index, which includes both these stocks, gained “only” 29.3%. France’s major luxury groups have nothing to envy their Swiss counterparts. PPR, whose brands include Gucci, increased 67.2%, LVMH 40.7% and Hermès 29.3%. Outperforming them all is Movado, whose share price leapt 103% over the last six months. Clearly a stock market rally, to use financial parlance.
Yet first-half results for the sector’s biggest groups aren’t exactly encouraging. Swatch has seen its sales shrink 15.3% with operating profits down 41.8% on the same period 2008. Richemont recently announced a decline in sales of 21% at actual exchange rates for the five months to August 31st 2009. LVMH Watches and Jewellery division has reported a 17% fall in sales for the first half. Only Hermès appears to have emerged relatively unscathed, with sales flat and a slight drop in operating profits of 2%.
The storm is subsiding
These first figures showing how the industry’s giants are faring haven’t cooled investors’ ardour. Far from it. Always one step ahead, they see an industry which has lost less than the market overall, which Kepler analyst Jon Cox estimates will decline 20% for the twelve months of 2009. Backing this is the fact that the industry should benefit from a positive base effect in the second half-year, given the sharp slowdown registered as of autumn 2008. With the world’s biggest watchmaker, the Swatch Group, declaring unflagging optimism, and Hublot CEO Jean-Claude Biver, equally upbeat, taking initiatives left, right and centre to occupy the terrain, ready for the recovery that is on its way, it seems the markets have all the reasons to be cheerful that they need.
Watchmaking’s multinationals, and not just them, are sufficiently well-armed to take the punches, particularly as their stores appear to have been relatively spared compared with independent retailers who have had to slash stocks over recent months. In this context, even words of caution from Johann Rupert, executive chairman of the Richemont board of directors, who has said he prefers to wait for evidence of a broader economic recovery, seem like good omens. In everyday language, this means the storm is subsiding, and the industry’s major players are the first to welcome the news.
Does this mean market investors should choose between this or that luxury group according to its capacity to bounce back? Should they take advice from Kepler, which recommends Richemont, or from Helvea which prefers Swatch, to give just two examples? Definitely not. Yes, the catch-up phase is well and truly over. However, current stock-market forecasts suppose an imminent upturn in the sector, and this will take months…