Swatch Shares Crash Most In Four Years As Profits Plunge On China Downturn 

The worsening economic slowdown in China, a massive market for luxury goods such as watches and handbags, weighed on top luxury stocks in Europe on Monday. Shares of Swiss watchmakers and other luxury companies are under the most pressure. 

Swatch Group AG, whose brands include Omega, Blancpain, and jeweler Harry Winston, reported a stunning 70% plunge in operating profit and a 14.3% plunge in sales for the first six months of the year compared with the same period last year. 

Here are the highlights of the earnings report for the first six months of the year

Net sales of CHF 3 445 million, -14.3% against the previous year at current exchange rates 

(-10.7% at constant rates). Negative currency impact of CHF -145 million. 

Operating profit of CHF 204 million (previous year: CHF 686 million). 

Operating margin of 5.9% (previous year: 17.1%).

Net income of CHF 147 million (previous year: CHF 498 million). 

Net margin of 4.3% (previous year: 12.4%).

Net liquidity1) of CHF 1 434 million (December 2023: CHF 1 988 million).

Equity of CHF 12.2 billion (December 2023: CHF 12.3 billion).

Equity ratio of 85.8% (December 2023: 86.1%).

Decline in sales triggered by the sharp drop in demand for luxury goods in China (including Hong Kong SAR and Macau SAR). Only the Swatch brand bucked the negative trend and even increased its sales in China by 10%.

Sales outside of China (including Hong Kong SAR and Macau SAR) in local currencies at the level of the record year 2023. Total sales 5.6% above the first half of 2022, at constant exchange rates.

Operating margin in the Watches & Jewelry segment (without Production) at 11.0%.

Strongly negative operating result in the Production segment in the short term due to the deliberate maintaining of all production capacities and renouncing from layoffs.

In June, the Group’s operating margin already rose again to over 15%, which is a positive sign for the second half of the year 2024.

Swatch shares in Zurich trading plunged as much as 11%, the most since March 2020, when governments worldwide began locking down economies over a virus likely from a Chinese lab.

Shares are back to Covid lows. 

Largest daily decline since the first round of Covid lockdowns in early 2020. 

For the second half of the year, Swatch warned, “The Chinese market (including Hong Kong SAR and Macau SAR) to remain challenging for the entire luxury goods industry until the end of the year.” 

Swatch Group Chief Executive Nick Hayek told Bloomberg that the downturn in demand for luxury goods is mainly centered in China. “The big impact is really mainly China,” he said.

RBC analyst Piral Dadhania said Swatch’s results are worse than expected. He expects “material earnings downgrades” are incoming. 

More from Dadhania (courtesy of Bloomberg):

Swatch (sector perform, PT CHF240). He expects material earnings downgrades on the back of this

Sees consensus Ebit reduced by ~30% and a more challenging than expected 2H24

In Europe, wholesale declined 10% on fears of excessive stock and retailers being more reluctant to reorder

Meanwhile Japan, Korea and others grew

Here’s what other Wall Street analysts are saying:

Vontobel’s Jean-Philippe Bertschy (hold, PT CHF220)

Says this was an ugly half year for Swatch Group in all respects

Co’s more than 10% sales decrease leads to significant negative operating leverage and more than 3x operating profit decline

Also notes significant loss in market share in terms of Swiss watch exports

Notes net cash is melting away

ZKB’s Patrik Schwendimann (market perform)

Says there will likely be significant profit revisions

Says China causes massive slump

Meanwhile, luxury companies have faced sliding demand for watches and handbags due to China’s slowing economy, as consumers in the world’s second-largest economy pull back on spending. 

The latest economic data from China shows that gross domestic product expanded by 4.7% in the second quarter compared with the same period a year earlier, missing forecasts despite Beijing’s countless efforts to boost economic growth and, most importantly, consumer confidence. 

Also, on Monday, Burberry’s shares plunged more than 15% after the company replaced its CEO. The British luxury clothing brand also warned about first-half losses as it continues to suffer waning demand from its China unit.