Swatch Gains After Watchmaker Indicates China Market Revival

(Bloomberg) — Swatch Group AG shares rose after it indicated that the slump in demand for luxury timepieces in China that’s hit its sales and profit in recent years is bottoming out. 

The Swiss watchmaking group, whose brands include Omega, Blancpain and jeweler Harry Winston, reported worse-than-expected sales and profit for the first six months, but said it expects a recovery in orders in the second half of the year in China, pointing to first signs of improvements in e-commerce and inventory reduction at retailers. 

“There is a hopeful note to the H2 outlook in China, which talks to a better balanced inventory position at retailers,” Jefferies analysts including Frederick Wild said in a note.

Shares rose as much as 5.4% in early Swiss trading. The stock was down 21% in the 12 months through Wednesday’s close.

In the first half, Swatch reported a worse-than-expected 7.1% drop in sales  “exclusively attributable” to China, including Hong Kong and Macau. Operating income plunged to 68 million francs ($85 million) — about half what analysts had estimated — from 204 million francs. 

Despite the hit on results, the company — which keeps jobs and production in Switzerland — said it refrained from laying off workers. Swatch posted double-digit sales growth in regions including North America, India and the Middle East. 

Citi analysts questioned whether the results miss really matters, pointing to positive signs including the company’s anticipated improvement in China, a modest headcount reduction and a product launch pipeline that should drive capacity utilisation improvements. 

The company has been contending for more than a year with falling demand for watches in China and Hong Kong. The trend has been weighing on the entire Swiss watch industry, which has seen exports falling in recent months amid the stronger Swiss franc and growing questions about the strength of the overall luxury sector. 

The downward trend continued in June, when Swiss watch exports fell 5.6%, according to a report by Federation of the Swiss Watch Industry Thursday. It attributed the prolonged slowdown to a correction in the US market and declines in Japan and Hong Kong.  

US President Donald Trump’s trade war has only piled on uncertainty, raising the possibility of reduced transatlantic trade. Switzerland is still waiting for a nod from Trump for a trade framework deal. 

–With assistance from Angelina Rascouet.

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