Swatch Group posts 13% income drop for 1st half 2002

The Swatch Group, the world’s largest watchmaker, posted net income of 206 million Swiss francs ($136.2 million) for the first half of 2002, a 13.1% drop from last year. A major reason, it said, was the “negative effect” of the rising value of the Swiss franc on worldwide earnings were they were converted to the Swiss currency. Other factors included sluggish watch sales in major tourist centers, due to reluctance to travel, and economic uncertainty.

Total Group sales tallied 1.9 billion Swiss francs ($1.2 billion), a 3.9% drop, and operating revenues were 271 million francs ($197.1 million ), 9.4% less than 2001’s first half.

The conglomerate, based in Biel-Bienne, Switzerland, made the announcement Aug. 21.

The Group’s core business—the 18 brands of its watch division, ranging from mass market to luxury priced—grew 1.1 % in worldwide sales. “In regional terms—with very few exceptions—all countries reported slight growth,” says the report. Within individual watch segments, “all a reported a slightly positive trend in local currency terms,” said the Swatch Group, indicating that “broad diversification within the watch segment, especially in a difficult market environment, is the right strategy.”

However, conversion of accounts to the strong Swiss franc “more than offset this positive effect,” causing a 3.4% drop in sales tallies from the first half of 2001, to almost 1.4 billion Swiss francs ($912.5 million).

Meanwhile, the Swatch Group continued its worldwide expansion of its retail business. That includes a new Blancpain store in Paris, new Tourbillion stores in Basel, Lausanne and Lugano, Switzerland, a new Breguet store in London. Omega boutique were scheduled to be opened later this year in Bangkok, Thailand, and Milan, Italy.

In addition, the expansion of jewelry collections for the Breguet, Léon Hatot, Omega and Swatch watch brands is “proceeding as planned and with success,” says the Group report.

In the Group’s production of watch movements and components, there was “a marked increase” in profitability, thanks in part to “strong and sustained demand” for the mechanical movements and components used in high-end watches. “This in turn had a positive impact on capacity utilization and on the profitability of the Group member companies concerned,” it said. For example, Universo, the biggest Swiss producer of watch hands, which Swatch acquired in 2000, was restored to profitability this year “through operational measures and higher production.”

However, a slight downturn in orders from third party customers for medium-priced Swiss-made movements, continuing price pressure on low price movements made and marketed in the Far East, and conversion of sales in Asia into Swiss francs counteracted the gains, causing a final 2.5% drop in sales, to 700 million Swiss francs ($462 million).

Sales for the group’s third major division, production of electronic components, also declined, especially in the telecom and automotive sectors, due to “sustained pressure on prices and worldwide overcapacities.”

“Despite a difficult situation on the financial markets and its consequences for the world economy,” the Swatch Group said it is “very confident” about the rest of 2002. “Particular attention will be given,” it said, “to even more intensive new product launches in the second half of the year [when] sales are traditionally at their highest.” The recent tendency of retailers to operate with lower inventories will also have “a positive impact on the Group towards the end of the year.” In addition, it noted, orders and turnover in movements and components normally “increase significantly in the second part of the year.

Still, the watchmaking conglomerate offered no predications about the second half results “due to uncertainty on the currency front [and] the impact on consumer sentiments of an environment influenced by economic and political factors, apart from the financial market and the media.”