Swatch Group Half Year Profit Up; Optimistic for 2nd Half

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Swatch’s Sistem51 is an automatic (self-winding) mechanical movement made from 51 components–no more, no less–made possible by a simplified and more efficient design. Most mechanical movements have at least twice as many parts; some have more than 600!

Zurich—Swatch Group, the world’s largest watch manufacturer, today reported that its first half profit increased more than 6% to 768 million Swiss francs (about $820 million) thanks to continued strength in key markets including Greater China.

The profit was better than the 728 million Swiss francs analysts had expected.

Operating profit rose to 910 million francs, which an operating margin of 22.7%, even though Swatch Group had major marketing expenses due to BaselWorld, investments in innovation and product and the integration of Harry Winston into its fold.

Gross sales in the first half were reportedly “slightly better-than-expected”: an 8.7% increase to 4.181 billion Swiss francs (about $4.48 billion) compared to 14.4% increase seen in the same period a year ago.

Nick Hayek, chief executive, said that the company “had experienced a sustained growth in all regions” and that “the outlook is very promising.” So much so that he predicted 5% to 7% growth in the company’s high end watch division, which includes Omega, Breguet, Blancpain etc.

“Omega has come back strongly in mainland China, it’s not growing at a double-digit pace, but it’s on a modest growth path again,” Hayek said.

Innovative Sistem51 Movement Arrives This Fall

Watches, along with other luxurygoods, were the target of a Chinese government crackdown on expensive gifts to officials who could help expedite transactions or business.

While shipments China have fallen, sales in Hong Kong continued to thrive since Chinese traveled there to buy without high taxes.  “We’ve always had at least 5% to 7% percent growth there, also in the high end,” Hayek told analysts on a conference call.

Moreover, Swatch Group said it expects sales growth and margins in the second half especially since demand for its Omega brand is increasing in China.

“The U.S. market is doing very well, the U.K. is improving and tourist shopping is supporting Italy,” Hayek said. “France is giving us a bit of a headache, without the tourists, there would be hardly any consumption there.”

Swatch Group has several other reasons to be optimistic about its second half. Besides the launch of new styles from most of its brands, the company will be introducing its Swatch Sistem 51, an inexpensive automatic mechanical movement, under its Swatch brand.

In fact, group’s operating margin will probably bounce back to 24% to 25% in the second half after dropping to 22.7% in the first due to high expenses at BaselWorld, investment into new products, such as its Sistem51 and an antimagnetic Omega.

The company is also please with its Harry Winston acquisition and says the business has been buoyant.

“We need a lot of high-end products at Harry Winston so we can satisfy all these customers walking, for example, into our store on 5th Avenue to buy necklaces and rings in the range of more than $10 million,” Hayek. “So you can imagine that it is crucial that enough products are available in the store.”