Swatch profit rises after crackdown on gray market

Bloomberg

Swatch Group AG shares gained after the Swiss watchmaker said it’s cracking down on unauthorised sales in an attempt to fetch higher prices.
The owner of Omega and Tissot reported a decline in first-half sales as it took aim against so-called gray-market distributors that have eroded its pricing power. It also suffered from a drop of more than 10 percent in revenue from Hong Kong, the largest export market for the industry, where political protests have kept tourists away.
While the steps to fight cut-price sales reduced revenue in the first half, operating profit came in ahead of expectations. The shares rose as much as 5.5 percent in Zurich.
The watchmaker said it took “uncompromising action” in the first half against gray market dealers, which typically buy up unsold stock from authorised dealers and sell it at big discounts. Chief Executive Officer Nick Hayek said it started taking action in the second half of 2018, though not to the same extent. Rival Richemont has been buying back excess inventory from the market since 2016.
“Temptation is big for dealers to ship their products to China,” where demand is stronger, Hayek said in a phone interview. “That’s what happened in the first half in a very pronounced way, and we immediately put a stop to it.”
The CEO also said he thinks full-year sales could grow by a low- to mid-single-digit percentage rate, excluding currency effects, helped by demand in mainland China, Japan and the US Comparisons also are becoming easier as Swatch had a slump in December last year.
“The gray market news is really encouraging,” said Jon Cox, an analyst at Kepler Cheuvreux. “You need to create the appearance of scarcity in luxury watches — otherwise they become a commodity.”
Inventory, which rose 2.6 percent to 7.1 billion francs ($7.2 billion), is a long-term concern, wrote Luca Solca, an analyst at Sanford C Bernstein.
Swatch shares have dropped 36 percent over the past 12 months while Richemont eked out a 1.9 percent gain. Watchmaking is one of the worst-performing luxury-goods categories lately, and more diversified rivals such as LVMH and Kering have been faring better. LVMH Chairman Bernard Arnault’s net worth outranked that of Microsoft Corp founder Bill Gates for the first time.
The decline in profit probably also reflects the struggles of
low-priced and mid-range timepieces. While Swiss watch exports have climbed in the
first months of 2019, the growth has been driven by higher-end watches costing more than 3,000 francs. Swatch relies on low- and mid-priced brands for the bulk of its earnings.
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The low-end watch segment is facing a disruption as many traditional retail channels are disappearing, making e-commerce more essential.
“It takes time to replace the volumes from the traditional channels, and of course there are also additional costs, but we’re at it now,” Hayek said.
He added that the company’s namesake maker of $50 plastic timepieces is profitable, even though margins of less expensive products are smaller.
Investors also may be disappointed that Swatch didn’t resolve all the bottlenecks that snarled production in the second half of 2018. The company said while it took care of the biggest problems, some remain to be fixed later this year.