* We cut Richemont FY16 EPS by 7%, Swatch 2016 by 9%
This reflects a weaker start to 2016 than we had expected and the subsequent
operating deleverage on margins given continued pressures from rental costs. For
Richemont we now sit 12% below consensus for FY16 and for Swatch we sit 10%
below. Given the importance of earnings momentum to short term share price
performance, we could see some weakness ahead. Our preference remains for
Richemont given its long term fundamentals including strong pricing power as well as
exposure to the branded jewellery market where there is a significant price mix
opportunity. Within European luxury our preference is for LVMH, Kering, Moncler and
Burberry.
* End consumer demand has seen a slowdown in 2016 to date
Worldwide tourism spending via Global Blue is +0.85% y/y in Q1 to date with Europe -
5%. This is a marked slowdown post +26% in 2015 and Q4 15 +13%. Company
commentary has also been more cautious from Swatch, Tiffany and the soft luxury
names that have recently reported. Rhetoric from the Basel watch fair has been bleak.
* Swiss watch export data for February –2% shows caution from the retailers
Adjusted for FX and an extra trading day we estimate wristwatches –c.12%. Retailers
remain overstocked and Hengdeli announced last week it has 248 days of inventory
which is 25% above target. This is reflected in this data with HK remaining soft at -
25% (Jan -33%) despite materially easier comps and Mainland China -7% (Jan -2%).
By price point, the situation was more mixed; the CHF200-500 segment (where Swatch
is most exposed) was -5.5% y/y (Jan -12%), while the luxury CHF3,000+ segment
(most important for Richemont) saw growth of 1% (Jan -7%) albeit on easier comps.
* How much of a risk is the Apple Watch?
UBS Evidence Lab commissioned a proprietary survey of 6,171 smartphone users across
the US, UK, Germany, mainland China (Tiers 1 and 2) and Japan in September/October
2015. We conclude that the first generation of the Apple Watch has been less of a
challenge for the Swiss watch industry than some had feared. The key risk for Swatch,
in our view, is whether the second-generation Apple Watch can change consumer
perceptions, and we see this as an overhang for the stock in 2016. Our downside
scenario for the Apple Watch suggests a 6-8% risk to Swatch's EBIT.