Swatch: watchmaker’s argument
Swiss group is going to need all the Churchillian vigour its chief can muster
In the spirit of Winston Churchill, Swatch chief executive Nick Hayek does not want to waste the coronavirus crisis — or so he told investors at the Swiss watchmaker’s results on Tuesday.
Unfortunately for Mr Hayek he will need more than the wartime prime minister’s rhetoric to turn this into an opportunity. The flight to safety has pushed the Swiss franc to levels last seen in 2015. That was one reason sales fell 46 per cent in the first half, pushing Swatch into its first-ever net loss.
Lockdown, of course, was the main reason. Sales in China, where the virus first surfaced, plunged more than 80 per cent in February — a big hit in a country that accounted for 36 per cent of the group’s revenue last year. South Korea’s less stringent lockdown meant year-on-year declines of a tenth at worst in March. Overall, Swatch has closed 260 stores this year. That will not only reduce costs — of paramount importance for the group — but also increase reliance on lower-margin wholesaling. Sales to third-party resellers rebounded more modestly in June as retailers unwound existing stocks.
Swatch needs to clear a similar inventory at group level, amassed in part by dwindling sales in Hong Kong. A combination of protests, which shut shops and deterred mainland tourists, resulted in group inventories hitting a high of 83 per cent of sales last year. This ratio has steadily grown from half of sales a decade ago, suggesting excess manufacturing capacity. Swiss luxury rival Richemont manages to keep inventories below half of sales. Mr Hayek wants to take this Covid-19 crisis opportunity to accelerate online sales. He will also need to implement aggressive cost control.
Swatch will need all the Churchillian vigour Mr Hayek can muster. Shares, despite being stuck at levels last seen in 2009, are historically expensive — trading at 19 times two-year forward earnings Swatch still looks pricey compared with five-year norms.
If Mr Hayek can pull off inventory adjustments, take the short-term hit on profits, and move sales online he has a fighting chance of keeping Swatch up with the times. Long-suffering shareholders may well feel they have already waited too long.