Share falls by 11 percent

For many years, the Swatch Group was a piece of Switzerland that was easy to boast about. Its founder, Nicolas Hayek, is to thank for nothing less than saving the Swiss watch industry from decline. And the Swatch watch, which revolutionized both watch technology and marketing more than forty years ago, became a symbol of this success.

Those days are over. Today, the voices that speak cautiously about the Swatch Group predominate. It is said that CEO Nick Hayek does not listen to critics and annoys investors. The effects that this can have were shown on the stock markets on Monday.

The Swatch share price fell by around 11 percent to 167 francs 35 this morning. The share has thus lost around a quarter of its value since the beginning of the year and the shares are trading at their lowest level in 15 years.

The reason for the drop in the markets was the half-year figures presented previously: Swatch Group’s net sales fell by 14 percent to 3.45 billion francs compared to the same period last year. Operating profit (EBIT) fell from 686 to 204 million francs. The bottom line was that Swatch Group’s consolidated profit after the first half of the year was 147 million francs. In the first half of 2023, it was half a billion francs. That corresponds to a decline of almost 71 percent.

Chinese are buying fewer watches

The Swatch Group explained its poor figures with the sharp drop in demand for luxury goods in China, Hong Kong, Macau and in the Southeast Asian markets, which are heavily dependent on Chinese tourists. While people had saved enough money to spend generously shortly after the pandemic, demand has been declining for some time. Chinese consumers in particular are suffering from the sluggish economy. China’s economy grew more slowly in the spring than it did since the beginning of 2023.

This situation is not new, and other brands in the upper price segment are also struggling with it. The French luxury goods group Kering, for example, announced in March that low demand from China was causing major problems for its Gucci brand. Now the Swatch Group is also being hit, and particularly hard: its brands, which include Omega, Longines and Tissot, are strongly represented in the area around China. Most recently, the region contributed a third of the group’s total sales.

Only the Swatch brand bucked the negative trend and was even able to increase its sales in China by 10 percent, the company said. And outside of China, sales were at the level of the record year 2023, with some regional fluctuations. While the USA, for example, achieved the record sales of the previous year, the geopolitical conflicts unsettled many European retailers. Because they feared excessive inventory levels, reorders fell.

The decline in orders from China has led to significantly lower sales and to “strongly negative operating results in the production area”. However, the Swatch Group is consciously accepting this because it wants to maintain its production capacities and refrain from laying off employees. This strategy should enable the group to recover more quickly when the next upturn occurs.

Confidence in luxury stocks is waning

The analysts had clear words to say about this on Monday. An analyst at Vontobel Bank said that the Swatch Group had had “an ugly six months in every respect.” China was not the main reason for the company’s problems, but the dangerous strategy of continuing to produce at a high level in the hope that sales growth would recover. And the Zürcher Kantonalbank wrote in a commentary that the valuation reflected the disappointing development of the past ten years, the low return on capital and the lack of investor friendliness.

But it wasn’t just the Swatch Group that made negative headlines on Monday; other luxury brands are also struggling at the moment. At Burberry, for example, sales fell by a fifth in the last quarter. The London-based group canceled its dividend and announced that it would miss its profit forecast for the current year if business continued as before.

The stock market reacted even more violently to this news than it did to the Swatch Group: Burberry’s share price lost 18 percent of its value on Monday morning. This also affected the large luxury goods groups Kering, LVMH and Richemont. Their shares lost between 2 and 5 percent.

The hope for the Olympic Games

The Swatch Group assumes that the Chinese market will not recover so quickly. However, China’s potential remains “intact,” the report says. The current situation offers “excellent opportunities for further growth,” especially for brands in the lower price segment.

Due to the positive development of the markets in Japan and the USA as well as the Olympic Games, from which the Swatch Group hopes to attract media attention as a sponsor, the group says it expects a “significantly improved situation” for the second half of the year.

Certainly, the Swatch Group has seen better times. However, it remains to be seen how much the current price fluctuations concern CEO Nick Hayek. In an interview with the NZZ newspaper at the end of March, he said: “The share price has no effect on us at all. We are and have never been dependent on the capital market.” Only time will tell whether Hayek is right.